What   Every   Investor 
Ought    to    Know 


BY 

ROBERT  L.  SMITLEY 


THE  MAGAZINE  ^WALL  STREET 
42  BROADWAY 

NEW  YORK 


COPYRIGHT,  1918, 

TICKER  PUBLISHING  CO.,  INC. 
Last  revised  edition,  1919 

THE    MAGAZINE   OF    WALL    STREET 


CONTENTS 

CHAPTER  PAGE 

1.     Knowledge   vs.    Chance — The   Investors' 

Necessity 7 

II.     Protecting    Dependents  —  The    Will  - 

Trust  Funds 18 

III.  What  is  a  Bond?  — How  Underwritten 

and    Marketed? 35 

IV.  Gauging    Personality  —  The    Importance 

of  the  Officers 48 

V.    The  Bond  Circular— How  to  Read  It- 
Good  and  Bad  Ones 61 

VI.    Kinds  of  Stocks  and  Bonds — Definitions      72 
VII.     Investing  a  Half  Million  Dollars  ...       83 

VIII.    The  Stock  Circular — 'Avoiding  its  Hyp- 
notism       101 

IX.     New  Promotions— The  Unreliable  Broker     114 
X.    Keeping  Proper  Records  of  Your  Wealth    127 

XL     Newspaper    Tips    and    Public    Gossip — 

Their  Pitfalls 139 

XII.    The  Financial  Books  to  Read— Arranged 

in  Courses 150 

3 


416927 


PREFACE 

THE   chapters   constituting  this   book  were 
published  in  various  issues  of  THE  MAGA- 
ZINE OF  WALL  STREET  by  the  author  under 
his  pen  names  of  Arthur  N.  Slocum  and  James 
Kennedy. 

Almost  all  books  written  for  the  investor  are 
both  technical  in  language  and  dry  reading. 
These  articles  are  set  forth  in  the  simplest  form 
and  fictitious  names  and  situations  are  used  to 
attempt  to  make  the  chapters  more  interesting  to 
the  reader.  The  author  hopes  that  the  casual 
investor  will  apply  such  instances  to  his  own 
case  and  thus  make  the  book  profitable  through- 
out. 

It  is  a  strict  rule  of  THE  MAGAZINE  OF  WALL 
STREET — wherein  these  chapters  appeared — to 
publish  only  articles  which  are  easily  understood 
by  every  reader  and  whose  context  has  an  actual 
concrete  value  to  the  reader.  This  summary  of 


6  ,      PREFACE 

purpose  has  been  attempted  in  each  chapter.  It 
may  be  that  the  reader  will  not  at  first  appreciate 
the  continuity  of  financial  education  set  forth  in 
each  chapter,  but  these  chapters  are  an  incentive 
for  further  study  and  each  one  contains  a  text 
which  may  be  enlarged  upon  at  the  will  of  the 
student. 

The  elementary  features  of  What  Every  In- 
vestor Ought  to  Know  may  be  found  in  this  book. 
Do  not  try  to  read  it  through  at  one  time.  Read 
a  chapter  at  a  time  and  then  take  up  the  supple- 
mentary reading  applying  to  this  particular  chap- 
ter. The  reader  will  find  that  it  will  be  very 
profitable. 

ROBERT  L.  SMITLEY 


WHAT  EVERY  INVESTOR 
OUGHT  TO  KNOW 

CHAPTER  I 

Financial  Knowledge  Versus  Chance 

Investor  and   Speculator — What  the   Classes 
Mean — What  to  Avoid 

KNOWLEDGE  spells  Success.  This  aphor- 
ism is  becoming  commonplace,  but  its 
truth  cannot  be  controverted.  Especially 
is  this  true  when  it  refers  to  dealings  in  the 
security  markets.  The  differentiation  between 
the  terms  speculator,  underwriter,  investor,  re- 
organizer,  and  promoter  is  usually  pronounced 
in  the  minds  of  all  those  who  are  acquainted  with 
the  terms,  but  when  the  actual  definition  is  called 
for,  the  dividing  line  is  blurred  and  indistinct. 
There  is  but  one  psychological  dividing  line. 
The  above  phases  of  the  security  business  stand 
on  one  side  and  the  Simon  pure  chance-taker 
stands  on  the  other  side. 


8  WHAT  EVERY  INVESTOR 

The  Chance-Taker 

This  class  of  operator  discards  the  funda- 
mental basis  of  the  speculator  or  investor,  which 
is  knowledge.  His  tools  are  Luck  and  Tips. 
The  books  of  a  fair  sized,  or  large  brokerage 
firm  could  easily  be  divided  into  the  two  classes, 
if  one  took  the  time  to  investigate  each  customer. 
The  writer,  at  one  time  a  partner  of  a  brokerage 
firm,  was  interested  to  a  sufficient  extent  to  make 
such  a  test.  There  were  about  three  hundred 
active  accounts  of  individuals  in  the  ledger  when 
the  list  was  taken.  Twenty-five  per  cent  of  these 
were,  without  doubt,  gamblers  and  the  rest  specu- 
lators and  casual  investors.  At  the  end  of  three 
years,  ninety  per  cent  of  the  gamblers  had  dis- 
appeared. Their  names  were  no  more  to  be 
found  in  the  ledger.  Not  more  than  ten  per  cent 
of  the  other  class  was  lost  to  the  business.  It 
was  a  clear  case  of  Science  versus  Luck,  with 
Science  the  winner  in  nearly  every  instance. 

Psychology  of  the  Gambler 

The  chance-taker  has  no  plan  of  campaign. 
He  is  a  creature  of  the  moment  much  as  a  butter- 
fly in  the  animal  world.  The  world  is  scien- 
tifically ruled  and  there  are  inviolate  mathe- 


OUGHT  TO  KNOW  9 

matical  rules  to  fit  the  gambler  in  any  game. 
The  chances  are  always  against  him  and  when 
this  element  of  mathematics  is  supplemented  by 
superstition,  the  chances  for  his  failure  are  en- 
hanced. The  word  Superstition- is  used  in  much 
the  same  manner  as  the  word  Luck  is  used. 
Both  eliminate  all  consideration  of  the  knowledge 
element. 

This  superstition  feature  is  the  most  ridiculous 
of  all  the  elements  which  tend  to  formulate  the 
gambling  character.  It  would  be  as  impossible 
to  list  all  the  superstitions  as  it  would  be  to  reach 
the  nth  power.  One  man  trades  in  U.  S.  Steel 
com.  because  in  the  past  it  has  been  his  luckiest 
stock;  a  second  always  sells  stocks  when  Trinity 
Church  chimes  are  playing  a  hymn;  a  third  be- 
lieves that  prices  fall  on  Tuesdays  more  than  any 
other  day  of  the  week ;  a  fourth  always  sits  in  a 
certain  chair.  The  list  could  be  continued  until 
it  would  become  tiresome,  if  it  were  not  tragic. 
Human  beings  are  all  imbued  with  a  certain 
degree  of  superstition,  but  the  man  who  can 
trade  his  superstitious  leanings  in  business  for 
a  modicum  of  real  knowledge  is  just  that  much 
ahead  of  his  former  kind. 

"Tips"  are  the  second  worst  tools  of  the 
chance-taker.  They  are  even  more  dangerous 


10  WHAT  EVERY  INVESTOR 

for  the  user  than  his  superstitious  qualities.  The 
rational  man  would  consider  the  reason  for  a 
"'tip."  In  the  realm  of  finance  there  is  no  senti- 
ment. Each  man  is  primarily  for  himself.  It 
is  the  law  of  nature  and  the  "tipster"  is  the  man 
who  offers  advice  without  a  basic  reason  for 
giving  it.  He  may  have  a  private  and  a  very 
personal  reason,  and  it  is  true  that  "tips"  often 
are  productive  of  gains,  but  only  when  the  recipi- 
ent acts  at  once  and  takes  his  profit,  if  any,  when 
it  appears,  without  the  slightest  delay.  Daniel 
Drew,  the  most  famous  of  the  "bears"  of  former 
days,  dropped  a  small  piece  of  paper  on  the  side- 
walk as  he  left  his  carriage  to  enter  his  office.  A 
by-stander  picked  it  up  and  read,  "Buy  5,000 
Erie  at  the  market."  Without  doubt,  this  order 
was  meant  for  Drew's  broker  and  the  loss  was 
an  accident.  Within  fifteen  minutes  every 
gambler  had  the  word  to  Buy  Erie.  Of  course 
Drew  created  an  excellent  market  for  his  sales 
that  particular  morning. 

Advice  versus  Tips 

It  is  the  one  purpose  of  legitimate  brokerage 
firms,  investment  houses,  news  agencies  and  mar- 
ket advisers  to  retain  their  followers.  To  do 


OUGHT  TO  KNOW  11 

this  they  must  advise  in  such  a  manner  that  they 
are  right  more  often  than  they  are  wrong.  The 
gambler  refuses  to  accept  the  experience  and 
knowledge  of  good  advisers,  whose  sole  business 
is  to  study  the  security  markets  from  every  view- 
point. He  prefers  the  excitement  of  following 
his  superstitions  and  tips.  The  result  is  inevit- 
able failure. 

Good  advice  and  purchased  assistance  for  the 
purpose  of  dealing  in  securities  are  even  more 
necessary  than  in  the  commercial  world.  The 
business  of  trading  in  stocks  is  more  difficult 
than  any  other  form  of  business,  and  it  is  unfor- 
tunate that  so  many  will  not  appreciate  this  fact 
until  they  first  burn  their  fingers  in  the  fire. 
From  the  psychological  point  of  view,  the  re- 
quirements, in  addition  to  sufficient  capital,  are 
Knowledge,  Study,  Good  Advice,  smooth-running 
machinery  and  above  all  a  firm,  brave  tempera- 
ment, so  different  fcom  that  of  a  gambler. 

The  Speculator 

The  limitations  of  this  article  are  too  confined 
to  list  the  resources  of  the  successful  speculator. 
Primarily,  however,  he  must  have  an  intimate 


12  WHAT  EVERY  INVESTOR 

knowledge  of  what  the  trend  of  the  security 
market  is  as  shown  both  by  the  prices — the 
"tape"  to  use  a  technical  word — and  exterior 
commercial  and  financial  influences.  These  in 
turn  may  be  influenced  by  political  and  socio- 
logical conditions.  There  are  plenty  of  excellent 
books  on  this  subject  and  there  is  at  least  one 
service  in  existence  which  will  assist  the  specu- 
lator. Our  study  is  the  man  who  has  taken 
advantage  of  such  opportunities. 

Cornelius  Vanderbilt,  Leonard  W.  Jerome,  An- 
thony W.  Morse,  Jay  Gould,  and  on  down  to 
men  of  today,  such  as  Bernard  Baruch,  are  types 
of  successful  speculators  who  have  bettered  the 
world  through  their  success.  The  "constructive" 
speculator  is  the  very  best  asset  which  any  coun- 
try can  have.  His  acquired  knowledge  teaches 
him  that  the  efforts  which  tend  toward  the  im- 
provement of  mankind  are  the  only  dependable 
speculative  efforts.  The  knowledge  acquired  by 
Mr.  Baruch  through  speculation  in  industrial 
securities  made  him  one  of  the  most  valuable 
men  for  this  country  on  the  Board  of  National 
Defense.  The  speculative  knowledge  acquired 
by  the  late  E.  H.  Harriman  in  railroad  securities 
caused  the  Union  and  Southern  Pacific  systems 


OUGHT  TO  KNOW  13 

to  open  up  a  country  which  will  possibly  supply 
the  nations  of  the  earth  with  food.  If  Mr. 
Harriman  had  been  but  a  chance  taker,  he  would 
not  have  achieved  what  he  did.  If  he  had  been 
but  a  careful  investor  and  had  not  studied  and 
planned,  the  result  would  have  been  somewhat 
the  same  as  the  gambler's  so  far  as  his  fame  is 
concerned. 

Required  Temperament 

To  plan  out  a  campaign  just  as  the  General  of 
an  Army  does,  is  the  necessity  of  the  Speculator. 
It  is  said  that  Germany  had  every  move  of  war 
mapped  out  in  advance  when  the  rush  was  made 
through  Belgium.  An  unexpected  check  was 
given  to  these  plans  at  the  very  start,  and  they 
had  to  be  at  once  revised  to  meet  the  new  con- 
ditions. It  was  absolutely  necessary  to  have 
the  original  plans,  even  though  they  were  later 
altered.  The  analogy  applies  to  the  speculator. 
He  maps  out  his  course  after  study,  advice,  retro- 
spect, and  outlook.  Once  determined  that  he  is 
right,  he  moves  forward  with  his  campaign. 
There  must  be  no  cowardice,  but  sometimes 
there  must  be  quick  decisions  and  retreats.  The 


14  WHAT  EVERY  INVESTOR 

old  campaign  type  of  speculator  does  not  con- 
sider one  reverse  or  one  false  move  the  end  of 
his  efforts.  He  fights  on  until  either  victory  or 
defeat  is  effected.  If  his  knowledge  is  better 
than  his  opponent's,  victory  is  assured,  but  he 
always  provides  a  safe  line  of  retreat  and  makes 
certain  that  his  commissary  department — his 
capital  or  margin — cannot  be  entirely  destroyed. 

The  successful  speculator  may  spend  all  his 
time  with  his  broker,  may  be  a  broker,  or  he  may 
devote  the  surplus  from  gains  derived  from  an- 
other business  and  speculation  may  be  only  an 
avocation.  In  any  event,  he  will  follow  his  own 
judgment  supplemented  by  the  best  advice  he  can 
buy;  his  temper  will  not  sway  his  purpose;  his 
nerves  must  be  trained  to  stand  sudden  shocks; 
and  he  will  not  be  influenced  by  superstition  or 
worthless  "tips." 

The  Investor 

In  following  out  the  psychological  trend  the 
Investor  is  classed  a  grade  or  two  higher  than 
the  Speculator.  Why  this  is  so  it  is  hard  to  de- 
termine, but  the  man  who  does  business  in 
stocks  and  bonds  is  much  better  satisfied  to  be 


OUGHT  TO  KNOW  15 

termed  an  Investor  than  a  Speculator.  If  the 
economic  status  is  carefully  examined,  it  will  be 
found  that  the  Speculator,  as  he  is  defined  in 
our  minds,  does  much  more  for  mankind  than 
the  Investor,  although  each  has  his  place. 

The  Speculator's  efforts  in  the  broader  sense 
affect  the  whole  community.  His  work  helps  to 
build  up  new  industries,  creates  new  positions 
for  workmen,  starts  new  cities  and  stimulates  all 
commercial  endeavor.  Without  the  speculator  in 
United  States  Steel  stocks,  we  would  not  have 
had  the  remarkable  resources  which  we  had  to  as- 
sist us  in  the  World  War.  We  would  not  have 
had  the  City  of  Gary,  Ind.  Had  Mark  Twain  not 
lost  all  his  money  trying  to  support  a  type-setting 
machine,  we  might  not  have  had  the  linotype  and 
its  kindred  forms  of  machinery. 

Almost  every  man  and  woman  has  become 
Investor.  But  the  Investor  requires  nearly  as 
much  knowledge  to  succeed  in  his  purpose  as  the 
Speculator.  He  does  not  realize  this  fact  so 
thoroughly  as  the  Speculator,  but  he  is  fast  com- 
ing to  realize  it.  The  old  type  of  Investor  was 
the  head  of  a  family  living  in  Rhode  Island  who, 
after  making  $100,000,  ''invested"  it  all  in  New 
York,  New  Haven  and  Hartford  Railroad  stock, 


16  WHAT  EVERY  INVESTOR 

so  that  his  family  would  never  want.  He  felt  so 
certain  of  his  investment  that  he  willed  it  to  his 
heirs  in  such  a  manner  that  it  could  not  be  sold. 
He  considered  a  broker's  office  as  equivalent  to 
a  gambling  hell  and  he  smugly  died  with  the 
knowledge  that  he  had  done  his  part  in  the 
world.  His  widow  is  probably  running  a  board- 
ing house  and  his  children  clerking  or  steno- 
graphing in  a  broker's  office.  He  was  one  of  the 
type  so  aptly  termed,  in  THE  MAGAZINE  OF  WALL 
STREET,  a  "Sleeping  Investor." 

Honore  Balzac,  in  his  Comedie  Humaine  series, 
considers  the  genus  "Old  Maid"  as  an  economic 
loss  to  the  world.  If  he  had  lived  today,  he 
would  probably  have  classified  "The  Sleeping 
Investor"  the  same  way.  The  successful  Inves- 
tor must  be  as  active  and  up-to-date  as  the  Specu- 
lator if  he  is  to  retain  his  income  and  capital. 
He  will  have  his  investments  examined  periodi- 
cally by  experts  just  as  he  will  go  to  his  dentist 
every  few  months  or  be  physically  examined 
by  his  family  doctor.  He  knows  that  it  is 
his  duty  to  take  out  Life,  Health  and  Fire  In- 
surance, but  he  also  knows  that  he  cannot  keep 
up  the  premiums  on  his  Life,  Health  and  Home 
unless  he  insures  his  Income  and  Capital. 


OUGHT  TO  KNOW  17 

The  Investor  is  organizing.  We  already  have 
two  or  more  organizations  comprising  railroad 
share  holders  and  it  will  not  be  long  until  the 
industrial  share  holders  will  come  together  under 
some  capable  leader  to  ask  for  uniform  reports 
or  some  other  excellent  feature  of  co-operation. 
The  Investor  is  gradually  awakening  and  the 
meaning  of  his  name  is  becoming  confused  with 
the  definition  of  the  Speculator. 

The  Investor  has  found  out  that  it  is  necessary 
for  him  to  keep  in  touch  with  events  and  happen- 
ings if  he  wishes  to  protect  and  increase  his 
funds.  The  habitual  bond  buyers  have  also 
reached  the  same  conclusion.  The  man  who 
once  purchased  Rock  Island  Co.  collateral  4% 
bonds  due  2002  at  60  or  70  and  put  them  in  his 
safe  deposit  box,  forgetting  he  had  them,  learned 
some  short  time  ago  for  the  first  time  that  the 
total  equity  to  which  he  was  entitled  after  the 
downfall  amounted  to  a  problematical  $100  or  so 
for  each  bond  costing  between  $600  and  $700. 
When  he  gets  his  next  surplus,  and  invests,  the 
investments  will  be  analyzed. 


18  WHAT  EVERY  INVESTOR 


CHAPTER   II 

Protecting  Your  Dependents 

Your    Will — Executor—Trust    Funds— Ante- 
Mortem  Preparation 

HAVE  you  made  adequate  preparation  to 
safeguard  your  family  or  dependents  in 
the  event  of  your  death? 
This  is  a  subject  which  is  not  by  any  means  a 
pleasant  one  to  discuss,  but  it  is  one  of  the  most 
important  matters  for  every  man  to  know  if  he 
desires  to  protect  those  who  are  dependent  upon 
him.    There  is  a  certain  amount  of  hesitancy  in 
attending  to  these  items,  because  no  one  desires 
to  think  of  the  possibilities,  but  it  is  the  unselfish, 
careful  man  who  does  think  of  and  attend  to 
such  matters  and  no  one  enjoying  the  finer  quali- 
ties of  mind  and  sensibility  desires  to  be  classed 
with  the  selfish  and  inconsiderate. 

There  are  three  distinct  steps  to  be  taken  in 
making  such  arrangements :  the  first  is  arranging 
the  estate,  no  matter  how  small,  so  that  it  may 
be  easilv  handled  for  the  best  interests  of  the 


OUGHT  TO  KNOW  19 

heirs ;  the  second  is  placing  of  the  increments  of 
the  estate  in  such  a  manner  that  the  beneficiaries, 
even  during  the  life  of  the  owner,  are  able  to 
derive  full  benefits  with  the  least  risk;  and  the 
third  and  most  important  step  is  the  matter  of 
the  will  and  the  executor. 

The  Investments 

Taking  into  consideration  the  fact  that  the 
owner  of  an  estate  which  will  ultimately  be  used 
for  the  purpose  of  giving  income  to  dependents 
desires  it  to  fulfill  the  original  purpose,  there  are 
three  important  items  for  careful  consideration. 

The  first  item  is  to  have  the  various  increments 
invested  so  as  to  bring  a  good  return  with  more 
than  reasonable  safety.  With  the  exception  of 
owning  a  home,  property  is  not  the  most  desirable 
element  to  consider.  However,  if  the  home 
exists  during  the  life  of  the  husband  and  father, 
it  should  be  one  which  can  be  kept  up  from  the 
income  derived  from  the  remainder  of  the  estate. 
It  should  certainly  not  be  encumbered  with  mort- 
gages or  any  kind  of  a  lien.  It  would  be  far 
better  to  dispose  of  all  equity  even  in  home 
property  and  arrange  for  rental,  if  there  is  the 


20  WHAT  EVERY  INVESTOR 

chance  of  dependents  falling  heir  to  encumbered 
property  (real  estate). 

Having  arranged  to  make  the  homestead  free 
from  all  possible  encumbrances,  the  next  step  is 
to  make  the  investment.  These  investments 
should  not  be  allowed  to  yield  much  over  five  and 
.one-quarter  per  cent.  If  the  flat  yield  does  go 
over  this  figure  it  is  very  possible  that  there  may 
be  one  or  two  items  which  will  be  liable  for  total 
loss  and  thus  decrease  the  income.  A  reasonable 
arrangement  is  this  (basing  the  total  value  of  the 
estate  at  $20,000)  : 

Home   and   property   unencumbered $  4,OOQ 

Actual  cash  in  Trust  Co.  2%  interest 1,000 

Guaranteed    mortgages,    5% 5,000 

Real  first  mortgage,  R.  R.  bonds,  4^% 5,000 

Real  first  mort.  Industrial  bonds,  5% 2,500 

A  good  list  of  preferred  stocks,  5^2% 2,500 

Total    $20,000 

The  cash  in  the  trust  company  should  be  a 
liquid  reserve  fund  to  meet  any  unexpected  con- 
tingency. It  should  never  be  touched  unless  in 
a  case  of  absolute  necessity.  The  trust  company 
is  the  best  depository  for  such  a  fund,  because 
it  gives  the  depositor  a  better  rate  of  interest,  and 


OUGHT  TO  KNOW  21 

is  just  as  safe  as  any  other  form  of  banking.  It 
would  be  best  to  have  the  deposit  in  one  of  the 
larger  trust  companies  of  the  nearest  large  city. 
The  local  National  bank  could  be  used  for  de- 
positing the  income  and  for  a  checking  account. 

The  guaranteed  mortgage  should  be  one  of  a 
duration  of  not  less  than  ten  years,  and  backed 
by  the  best  title  and  guarantee  company  available. 
It  is  well  to  investigate  the  actual  property  on 
which  the  guaranteed  mortgage  is  a  participation 
whenever  possible,  but  if  the  guarantor  is  well 
known  as  reliable,  it  is  reasonably  safe  to  accept 
his  word  for  the  basis  of  the  mortgage.  This 
kind  of  a  mortgage  permits  the  owner  to  be  free 
from  all  complications  of  a  legal  nature. 

The  real  first  mortgage  railroad  bonds  are 
differentiated  from  so-called  first  and  refunding, 
mortgage  bonds.  A  bond  like  Iowa  Central  1st 
and  refunding  4  per  cents,  would  never  do.  The 
name  is  a  misnomer,  for  the  first  mortgage  con- 
sists of  a  very  small  proportion  of  mileage  and 
the  first  lien  on  a  bridge.  The  help  of  a  good 
financial  service  and  also  of  a  trust  company 
should  be  called  in  to  judge  this  item  of  the 
estate  as  well  as  all  other  items  mentioned. 

The  first  mortgage  industrial  bonds  are  classi- 


22  WHAT  EVERY  INVESTOR 

fied  similar  to  the  Central  Leather  Co.  1st  5  per 
cent,  bonds,  or  the  Bethlehem  Steel  Co.  1st  5  per 
cent,  bonds.  There  are  very  many  excellent  ex- 
amples of  this  form  of  investment,  but  the  inves- 
tor must  be  very  sure  not  to  be  deceived  as  to 
the  bonds  being  a  first  lien  and  having  the  back- 
ing of  the  entire  resources  of  the  corporation. 

The  preferred  stocks  should  be  chosen  from 
the  tried  field.  Not  only  should  the  past  history 
of  the  company  be  investigated  in  a  thorough 
manner,  but  the  record  of  dividends  over  a  period 
of  years  and  a  complete  study  of  the  outlook  for 
the  future  should  be  made.  Good  investments 
in  the  railroad  field  such  as  Atchison  Preferred 
and  Union  Pacific  Preferred  or  even  in  the 
Industrial  field  such  as  U.  S.  Steel  Preferred  or 
National  Lead  Preferred  are  examples  of  this 
particular  form  of  investment.  •  ^ 

An  alternative  of  a  very  safe  nature  would  be 
to  substitute  one  of  the  Government  (Liberty 
Loans)  for  a  first  mortgage  bond  of  the  railroad 
variety.  The  investments  should  not  be  made  in 
more  than  $1,000  in  each  kind  of  railroad  bonds 
or  more  than  $500  in  each  class  of  industrial 
bonds  and  preferred  stocks  (on  the  $20,000 
basis).  Attention  should  be  given  also  to  a 


OUGHT  TO  KNOW  23 

thorough  geographical  distribution  so  as  not  to 
have  the  liens  covering  one  locality. 

How  to  Make  It  Easy  for  the  Beneficiary 

If  the  father  or  husband  is  going  to  fight  for 
his  country  and  the  expectation  of  his  return  to 
his  dependents  is  doubtful  or  even  if  the  estate 
is  to  be  arranged  for  easy  liquidation  after  death, 
there  are  important  steps  to  be  taken. 

Should  the  owner  be  a  resident  of  New  York 
State  he  must  take  into  consideration  the  law 
which  places  a  tax  on  all  bonds.  The  bonds 
should  be  made  tax  exempt  by  paying  the  costs 
at  once.  This  covers  a  period  of  five  years. 
Should  the  bonds  not  be  made  tax  exempt  the 
State  authorities  will  step  in  when  inventory 
of  the  estate  is  taken  and  charge  a  large  in- 
terest item  in  addition  to  the  regular  tax  involved. 

Each  share  of  stock  should  be  endorsed  in 
blank  and  properly  witnessed  and  dated.  In  the 
event  of  the  owner's  non-return  the  stock  will 
not  have  to  be  transferred  for  sale  or  to -go 
through  endless  red  tape  to  have  the  dividends  go 
to  the  proper  parties. 

The  bonds  should  be  registered  as  to  principal 


24  WHAT  EVERY  INVESTOR 

and  interest  whenever  possible,  and  the  owner 
should  furthermore  make  out  separate  bond 
powers  in  blank,  having  them  properly  dated 
and  witnessed  in  the  same  manner  as  the  stock. 
The  guaranteed  mortgage  could  easily  be  made 
out  to  two  parties  so  that  in  the  event  of  the 
death  of  the  head  of  the  family  the  proper  ben- 
eficiary would  have  little  difficulty  in  acquiring 
the  full  title.  N 

During  the  life  of  the  family  head,  the  item  of 
cash  in  bank  should  be  to  the  credit  of  a  joint 
account  so  that  no  embarrassment  will  come  to 
the  heirs  when  the  need  of  the  ''rainy  day"  sur- 
plus comes.  Without  question  the  homestead 
should  be  placed  in  the  name  of  the  one  to  whom 
it  is  destined  ultimately  to  go.  There  are  no 
other  means  to  get  away  from  legal  red  tape 
unless  this  idea  is  fully  carried  out. 

An  Alternative 

If  for  any  reason  the  head  of  the  family  about 
to  depart  for  war  or  in  arranging  his  ante-mortem 
affairs  does  not  desire  to  go  so  far  in  these  safe- 
guards, there  is  the  alternative  of  using  the 
services  of  the  trust  company.  Any  trust  com- 


OUGHT  TO  KNOW  25 

pany  will  help  conserve  the  total  property  during 
the  lifetime  of  the  owner  by  creating  a  trust  for 
one's  own  benefit.  This  trust  can  also  be  ex- 
tended for  the  benefit  of  the  family  after  death. 
The  trust  company  takes  entire  charge  of  all  the 
property  at  a  very  nominal  sum  and  will  do  all 
the  work  of  collecting  and  disbursing  the  income 
both  during  the  absence  of  the  head  of  the  family 
or  in  the  event  of  his  death.  There  is  no  limit 
to  the  kind  of  trusts  which  may  be  created,  so 
that  there  is  no  excuse  for  the  head  of  the  family 
not  taking  advantage  of  this  form  of  protection. 

In  addition  to  this,  it  is  possible  for  the  trust 
company  to  safeguard  all  the  increments  of  in- 
vestment during  the  life  of  the  principal,  without 
creating  a  trust.  Such  a  form  of  procedure  per- 
mits the  father  or  husband  to  invest  with  a  little 
higher  rate  of  interest  than  that  allowed  under 
pure  trusts.  The  company  will  keep  these  invest- 
ments in  a  private '  vault,  collect  and  disperse  all 
items  of  income,  and,  furthermore,  look  after  the 
individual  securities  so  that  they  will  not  lose 
from  improper  watching. 

It  is  difficult  to  overestimate  the  value  of  the 
trust  company's  services  under  such  conditions. 


26  WHAT  EVERY  INVESTOR 

Keep  Records 

A  complete  list  of  all  securities  owned  by  the 
estate  should  be  left  enclosed  with  the  will  and 
another  copy  given  to  the  principal  beneficiaries. 
In  this  way  there  exists  a  complete  check  on  the 
estate  and  a  safeguard  against  any  crooked  deal- 
ing. The  deed  for  the  homestead  and  all  receipts 
denoting  that  taxes  have  been  paid  to  date  should 
be  a  part  of  the  contents  of  the  safe  deposit  vault 
or  go  to  the  trust  company  handling  the  business. 
The  deed  must  be  entered  on  the  county  records 
and  all  papers  relating  to  the  insurance  of  the 
title  to  the  property  or  fire  insurance  on  the  home 
should  be  attached.  A  personal  property  inven- 
tory of  effects  belonging  to  the  household  show- 
ing the  location  and  original  cost  should  be  a 
part  of  the  records,  for  this  is  a  very  necessary 
item  of  proof  for  collection  in  case  of  fire. 

An  Executor 

A  trust  company  is  a  thousand  times  safer 
than  an  individual  for  the  purpose  of  conserving 
the  estate,  either  on  the  basis  of  trusts  while 
living  or  executor  duties  after  death.  The  trust 


OUGHT  TO  KNOW  27 

company  cannot  charge  more  than  the  legal  rate 
for  such  duties  and  in  addition  to  this  feature 
there  is  no  possibility  of  undue  risks  such  as 
arise  in  a  one  man  trust  proposition. 

The  head  of  a  family  often  has  a  close  friend 
in  whom  he  has  implicit  confidence.  He  thor- 
oughly believes  that  this  friend  will  do  more  for 
his  dependents  than  a  trust  company.  He  does 
not  take  into  consideration  the  personal  element 
which  exists  wherever  the  individual  is  con- 
cerned. This  element  is  that,  because  a  man  is 
human,  he  may  be  swayed  by  ulterior  influences 
even  if  under  bond  to  protect  the  estate.  This 
friend  may  become  seriously  incapacitated  men- 
tally or  physically.  He  may  die  soon  after  or 
before  the  family  head,  or  his  personal  affairs 
may  become  so  pressing  that  his  time  is  not  given 
to  the  interests  of  the  estate  or  trust  which  he 
controls.  It  is  doing  neither  the  heirs  nor  depend- 
ents a  favor,  nor  is  it  doing  the  trustee  or 
executor  a  favor  to  put  him  in  this  position. 

The  employment  of  a  trust  company  in  the 
fiduciary  capacity  is  the  only  rational  method  of 
procedure.  The  trust  company  performs  its  acts 
strictly  in  an  impersonal  method,  under  stringent 
laws  of  control  and  through  committee  decisions. 


28  WHAT  EVERY  INVESTOR 

Two  heads  are  better  than  one  and  two  or  more 
experienced  heads  are  infinitely  better  than  one 
possibly  very  inexperienced  head. 

Eliminate  Legal  Items 

In  addition  to  the  care  in  selecting  a  competent 
trustee  or  executor,  the  warrior  about  to  leave 
for  probable  death  must  try  to  eliminate  as  many 
legal  complications  as  possible.  There  is  nothing 
which  will  eat  up  an  estate  so  quickly  as  to  get 
it  tangled  up  with  law  expenses.  There  is  cer- 
tainly a  place  for  the  legal  element  in  our 
worldly  affairs,  but  the  more  the  law  and  lawyers 
are  kept  away  from  an  estate  or  trusteeship,  the 
greater  is  the  amount  conserved  for  the  depend- 
ents. The  trust  companies  all  maintain  legal 
departments  , which  service  comes  under  the  reg- 
ular expense  of  administration.  '  The  extras  are 
done  away  with  and  the  costly  red  tape  is  pre- 
vented to  the  distinct  advantage  of  the  benefi- 
ciaries. 

The  Will  and  the  Executor 

Without  exception  every  man  should  make  a 
will.  If  he  dies  without  a  will  the  law  steps  in 


OUGHT  TO  KNOW  29 

with  all  its  costly  features  and  regardless  of  the 
actual,  needs  of  the  heirs,  settles  according  to 
law  and  not  according  to  reason  how  the  estate 
should  be  divided.  There  are  set  rules  for  the 
division  of  an  estate  when  the  owner  dies  with- 
out a  will.  In  addition  to  this  it  is  the  usual 
custom  for  the  courts  to  appoint  the  administra- 
tor who  is  nearest  of  kin  without  much  regard 
for  his  or  her  ability  to  administer.  In  this  way 
much  money,  both  from  income  and  principal,  is 
lost.  By  all  means  do  not  neglect  to  make  a  will 
if  it  is  your  desire  to  give  those  dependent  upon 
you  the  full  benefit  of  what  you  wish  them  to 
have. 

Make  the  will  just  as  short  as  possible.  The 
more  words  used  in  a  will  offer  greater  oppor- 
tunities for  ambiguity  and  therefore  legal  com- 
plications. If  the  testator  can  compress  the  will 
into  one  or  two  simple  paragraphs  there  will  be 
a  greater  chance  for  the  will  to  stand. 

One  excellent  method  is  to  place  the  invest- 
ments in  the  names  of  those  to  whom  the  will 
directs  they  shall  go,  before  the  death  of  the 
head  of  the  family.  Such  beneficiaries  may  sign 
the  certificates  in  blank  or  give  unfilled-in 
powers-of-attorney  for  the  bonds.  The  invest- 


30  WHAT  EVERY  INVESTOR 

ments  are  therefore  negotiable  during  the  life 
of  the  owner,  though  not  in  his  name.  If  you 
own  5  shares  of  Atchison  preferred  stock  and 
desire  it  to  go  to  your  wife,  Jane  Smith,  after 
you  die,  so  designating  this  amount  in  your 
will,  have  the  transfer  made,  at  the  time  of  pur- 
chase, to  Jane  Smith.  Jane  Smith  may  then 
endorse  the  certificate  in  blank  and  it  is  usable 
for  your  own  purposes  during  your  life  and  you 
may  sell  or  change  your  purpose  at  any  time, 
for  the  stock  has  been  made  negotiable. 

Either  have  your  own  lawyer  draw  your  will 
or  have  the  trust  company  do  it  for  you.  Do  not 
attempt  a  holographic  or  home  made  will.  The 
law  has  a  language  all  its  own  and  the  layman 
is  absolutely  unacquainted  with  it.  A  number 
of  years  ago  one  of  the  justices  of  the  Orphans' 
Court  of  Pennsylvania  drew  a  full  and  com- 
plicated will.  He  had  been  passing  on  the  valid- 
ity of  wills  for  years  and  yet  his  own  will  was 
easily  broken.  Very  few  doctors  can  cure  their 
own  diseases  and  very  few  lawyers  can  do  their 
own  legal  work.  It  is  therefore  best  to  follow 
the  plan  of  brevity  and  clearness  if  it  is  your 
desire  to  properly  safeguard  your  dependents. 


OUGHT  TO  KNOW  31 

What  an  Executor  Must  Know 

Above  all  else  do  not  make  a  relative,  or  any 
other  single  person,  whether  friend  or  lawyer, 
the  executor  of  your  will.  Here  are  a  few 
"qualifications  for  an  executor"  suggested  by 
H.  A.  Blodgett  in  his  pamphlet  of  that  name: 
Real  estate  values,  the  true  value  of  various 
classes  of  securities,  the  trend  of  the  money 
market,  the  laws  and  ordinances  affecting  prop- 
erty, including  the  Federal  Income  Tax  Law, 
the  Inheritance  Tax  Law,  the  Exempting  of 
Bonds  and  Trust  Funds.  He  must  also  have 
a  good  knowledge  of  reports  constructed  in  legal 
form,  bookkeeping,  and  legal  accounting.  He 
must  be  a  man  of  keen  knowledge  and  experi- 
ence and  he  must  not  have  any  partiality  for  one 
heir  over  another.  In  fact,  the  foregoing  are  but 
a  few  requirements  for  a  mediocre  executor. 
Why  not  be  on  the  safe  side  and  employ  a  com- 
petent trust  company  in  the  first  place? 

When  a  trust  company  is  employed  with  the 
expectation  of  handling  all  the  financial  details 
of  the  man  who  is  leaving  for  the  "front"  or 
intends  to  be  away  for  an  indefinite  period,  the 


32  WHAT  EVERY  INVESTOR 

Trust  Fund  is  the  instrument  utilized  to  effect 
this  financial  relationship. 

This  Trust  Fund  will  take  charge  of  all  the 
property  of  the  soldier  or  traveler.  Without  his 
assistance  it  will  collect  his  income  from  every 
available  source,  pay  his  taxes,  insurance,  fixed 
expenses  and  in  addition  will  invest  his  surplus 
from  the  accrued  income  or  either  remit  the  pro- 
ceeds of  the  income  to  him  or  to  some  one  whom 
he  may  designate. 

A  complete  and  understandable  statement  of 
all  such  transactions  is  rendered  periodically  to 
the  owner  and,  in  case  of  his  death,  the  Trust 
Fund  will  be  transferred  to  the  beneficiaries 
either  designated  in  the  Trust  Agreement  or  in 
his  will. 

"The  Trust  Company  acts  as  representative 
for  living  or  dead  in  practically, every  legal  rela- 
tion in  which  an  individual  can  act.  It  must  not 
only  keep  intact  the  estate  of  which  it  has  charge, 
but  must  safeguard  the  interest  of  every  bene- 
ficiary."* 

The  writer  has  endeavored  to  point  out  the 
safest  and  best  methods  for  the  soldier  who  is 

*Ralph  W.  Davis. 


OUGHT  TO  KNOW  33 

leaving  for  the  front  or  the  careful  man  who 
hopes  to  best  conserve  his  estate  for  his  depend- 
ents. The  trust  company  is  a  national  institu- 
tion. Its  business  is  the  safekeeping  of  securi- 
ties, the  management  of  property  and  the 
collection  of  incomes.  These  items  are  as  much 
in  its  province  as  the  care  of  teeth  is  the  real 
business  of  the  dentist.  One  does  not  go  to  the 
lawyer  with  a  bad  molar,  therefore  why  permit 
an  inexperienced  man  to  guard  all  you  own 
which  you  purpose  to  be  left  for  the  comfort  of 
your  wife  or  children  ? 

The  Summary  of  Precaution 

When  going  away  to  fight  for  your  country 
or  preparing  your  estate  for  your  dependents  in 
case  of  your  death : 

Be  careful  to  choose  good  and  diversified  in- 
vestments. 

Have  them  carefully  analyzed  by  experts  be- 
fore purchase. 

Keep  sufficient  ready  money  within  easy  reach. 

Do  not  invest  in  real  estate  except  for  a  home. 

Do  not  attempt  to  get  too  large  an  income. 

Permit  a  good  trust  company  to  handle  the 


34  WHAT  EVERY  INVESTOR 

estate  for  you  if  you  are  called  away  from  home 
to  service. 

Establish  a  trust  fund  during  your  lifetime. 

Keep  your  securities  negotiable  and  endorsed. 

Insure  land  titles  and  register  all  deeds. 

File  all  tax  bills  with  your  deeds. 

Tax  exempt  all  bonds. 

Make  a  short  will,  uncomplicated  in  form. 

Make  the  trust  company  your  executor. 

Have  periodical  analyses  of  your  holdings. 

Make  provisions  for  "switching"  an  investment 
if  it  appears  to  be  turning  out  badly. 

Keep  as  far  away  as  possible  from  law  courts. 


OUGHT  TO  KNOW  35 


CHAPTER   III 

What  Is  a  Bond? 

How  It  Is  Underwritten  and  Marketed — Why 
is  a  Bond  Necessary? — What  Happens  to 
It? 

THE  Great  War  has  demonstrated  the  effi- 
ciency of  the  aeroplane.    Men  with  ability 
and  foresight — also  capital — realized  the 
profitable  future  for  this  aircraft  business.     It 
was  for  this  reason  that  the  Phantom  Aero  Co. 
was  formed  ( Invented  by  the  author  for  the  pur- 
pose of  illustration). 

During  the  first  few  years  of  existence,  this 
new  company  experimented,  changed  and  reor- 
ganized. Incorporated  under  the  laws  of  New 
Jersey,  there  existed  a  capital  account  of 
$25,000,000,  half  preferred  stock  and  half  com- 
mon stock.  In  1917  the  great  test  came.  The 
United  States  Government  entered  boldly  into 
the  world  struggle,  and  the  great  need  was  for 
aeroplanes.  The  Phantom  Co.  had  not  made 
money.  Its  both  classes  of  stock  had  sold  far 


36  WHAT  EVERY  INVESTOR 

below  par.  The  seven  per  cent,  preferred  had 
never  paid  a  dividend,  and  the  common  had  been 
the  football  for  speculative  operations.  The  ad- 
vent of  aeroplane  demand  had  created  new  possi- 
bilities and  eager  investors  had  purchased  both 
classes  of  stock  until  the  preferred  was  quoted  at 
60  and  the  common  at  15.  The  credit  of  the 
company  had  advanced  on  account  of  new  con- 
ditions. 

The  affairs  were  conducted  by  the  officers, 
elected  by  a  board  of  directors,  who,  in  turn, 
were  elected  by  the  stockholders.  The  present 
set  of  officers  happened  to  be  efficient.  At  a 
meeting  of  the  board  of  directors,  President 
Smith  spoke. 

"Gentlemen,  this  company  must  grow.  We 
have  the  patents  and  the  manufacturing  plant; 
we  also  have  the  orders.  But,  it  is  costing  us 
too  much  to  do  business,  as  we  lack  sufficient 
working  capital.  We  are  paying  an  exorbitant 
rate  of  interest  for  loans  and  our  credit  is  limited 
on  account  of  the  small  deposits  we  carry. 
What  must  be  done?  What  can  you  propose  to 
give  us  an  opportunity  to  make  large  profits  for 
our  stockholders?" 


OUGHT  TO  KNOW  37 

The  treasurer,  a  comparatively  young  man 
named  Brown,  immediately  suggested, 

"Bonds !" 

"We  need  at  least  $5,000,000  working  capital," 
he  said,  "and  this  is  costing  us  over  6  per  cent., 
or  about  $320,000  each  year.  Our  credit  is  now 
excellent  among  investors,  and  I  believe  that  we 
will  save  money  by  issuing  a  5  per  cent,  bond." 

The  directors  decided  upon  this  method  of 
financing,  and  the  plan  was  presented  at  a  meet- 
ing of  the  stockholders.  Over  50  per  cent,  of 
the  stockholders  endorsed  and  voted  for  this 
issue,  for  the  saving  features  were  clearly  notice- 
able. 

$5,550,000  bonds  sold  at  90  =  $4,995,000. 

Interest  at  5  per  cent,  on  $5,550,000  =  $277,- 
500. 

Saving  on  interest  every  year  $42,500. 

Twenty-five  year  need  for  borrowing  $1,062,- 
500  saved  $555,000.  Premium  loss  deducted 
from  the  $1,062,500  equaled  $507,500.  Interest 
saved,  which  would  be  used  to  apply  to  redemp- 
tion. 

Of  course,  a  sinking  fund  was  established  to 
raise  during  the  25  years,  the  capital  to  meet 


38  WHAT  EVERY  INVESTOR 

the  bonds  when  due,  but  this  phase  would  have 
to  be  supervised  by  the  lawyers  and  the  trustee. 

The  Banking  Firm 

Treasurer  Brown  took  a  trip  to  New  York, 
and  arranged  a  meeting  with  Mr.  Lee,  of  Lee; 
Green  &  Co.,  prominent  and  wealthy  bankers. 
At  the  first  conference  he  said,  "Mr  Lee,  the 
Phantom  Co.  desires  to  issue  $5,550,000  25-year 
5  per  cent,  bonds.  You  will,  of  course,  make 
a  thorough  examination  of  the  company  and  give 
us  your  verdict.  There  is  no  need  for  me  to  go 
into  details  because  your  experts  will  give  you 
the  facts.  When  may  I  expect  a  decision?" 

"Within  the  next  thirty  days." 

About  four  weeks  later  Treasurer  Brown  re- 
ceived the  following  letter: 


Dear  Sir: 

The  reports  of  our  investigators  in  the  matter  of 
the  Phantom  Aero  Co. — re  proposed  bond  issue — have 
been  filed.  We  will  take  over  the  entire  issue  .of 
$5,550,000—25  year  5  per  cent,  bonds  at  a  flat  price  of 
90.  If  you  accept,  kindly  arrange  to  have  your  law- 
yers confer  with  Messrs.  Dundee  &  Co.,  our  attorneys, 
and  at  that  time  the  adoption  of  the  trustee,  the  terms 
of  the  mortgage,  the  indenture  and  other  incidentals 


OUGHT  TO  KNOW  39 

will  be  arranged.    If  the  conference  agrees,  we  will  be 
prepared  to  act  at  once. 

Very  Truly, 

Lee,  Green  &  Co. 

After  the  lawyers  had  agreed  on  the  form  of 
the  bond,  the  provisions  regarding  interest,  sink- 
ing funds,  and  the  equity  to  protect  the  principal, 


Bond  and  Coupons 


40  WHAT  EVERY  INVESTOR 

the  Standard  Trust  Co.  was  called  into  act  as 
the  trustee. 

For  a  commission  the  trust  company  agreed  to 
act  for  all  those  who  would  buy  the  bonds.  The 
Phantom  Aero  Co.  executed  a  mortgage  in  favor 
of  the  Standard  Trust  Co.,  which  stated  that  all 
the  property  owned  by  the  Phantom  Co.,  esti- 
mated at  a  sale  price  of  $15,000,000,  would  be 
placed  in  the  hands  of  the  Standard  Trust  Co.  to 
protect  the  lenders.  In  addition  the  Phantom 
Co.  agreed  that  if  the  interest  funds,  to  be  paid 
out  semi-annually  by  the  trust  company,  were 
not  forthcoming  at  the  proper  date,  the  trust 
company  would  have  the  right  to  confer  with 
the  bond  holders  and  sell  the  equity  back  of  the 
mortgage.  The  Standard  Trust  Co.  agreed  to 
pay  out  the  interest  when  due  and  the  principal 
when  due,  to  the  holders  of  the  coupons  or  the 
bonds.  These  papers  were  made  out  by  the  law- 
yers on  both  sides,  properly  registered  in  the 
records  of  the  county  where  the  property  was 
situated,  and  temporary  certificates  of  indebted- 
ness were  issued  to  the  bankers,  Lee,  Green  & 
Co.,  until  the  actual  bonds  could  be  printed. 

The  firm  of  Lee,  Green  &  Co.  paid  the 
Standard  Trust.  Co.  $4,995,000,  which  was  de- 


OUGHT  TO  KNOW  41 

posited  to  the  credit  of  the  Phantom  Aero  Co. 
for  its  own  use.  An  arrangement  was  also  made 
that  the  Standard  Trust  Co.  should  act  as  de- 
pository for  the  Sinking  Fund,  an  amount  set 
aside  each  year  out  of  the  earnings  and  interest 
saved,  to  pay  the  principal  when  the  25  years 
was  up. 

It  must  be  noted  here  that  the  Phantom  Aero 
Co.  has  its  money.  It  must  pay  5  per  cent,  on  a 
loan  of  $5,550,000,  for  which  it  only  received 
$4,995,000.  The  rest  of  the  proceedings  is  en- 
tirely in  the  hands  of  Lee,  Green  &  Co.  The 
Phantom  Co.  might  have  made  arrangements  to 
offer  this  loan  to  its  stockholders  direct,  but  it 
was  safer  to  put  it  in  the  hands  of  the  bankers, 
and  much  cheaper.  It  is  now  up  to  the  bankers 
to  make  their  profit. 

The  Distribution 

Lee,  Green  &  Co.,  with  the  consent  of  the 
Phantom  Aero  Co.,  sent  out  a  notice  to  all  the 
stockholders  of  the  company  that  until  a  certain 
date  such  stockholders  will  be  permitted  to  sub- 
scribe to  these  new  bonds  at  95.  Each  stock- 
holder owning  100  shares  of  either  class  of  stock 


42  WHAT  EVERY  INVESTOR 

may  purchase  $1,000  of  this  loan  at  $950,  and  a 
certificate  known  as  "Right  to  Subscriber"  is 
sent  to  each  stockholder  of  record  on  a  certain 
date.  Depending  on  the  terms  of  the  indenture 
and  the  price  of  the  stock  these  "Rights"  are 
valuable  or  they  are  not  valuable.  The  stock- 
holder may  either  exercise  his  option  or  he  may 
sell  it  to  some  one  else.  In  any  event,  on  the 
date  set,  the  subscriptions  are  counted,  and  we 
will  suppose  that  only  $3,000,000  is  taken  by  the 
stockholders  of  the  company.  This  leaves 
$2,550,000  in  Lee,  Green  &  Co.'s  hands. 

The  Syndicate 

Before  beginning  the  sales  campaign  with  the 
stockholders,  Lee,  Green  &  Co.  called  into  con- 
ference four  other  banking  or  investment  firms. 
The  data  regarding  the  Phantom  Aero  Co.  was 
submitted  and  the  other  firms  agreed  that  this 
was  an  opportunity  for  profit.  They  formed  an 
agreement  to  take  over  at  95  all  the  unsold  bonds 
and  to  make  Lee,  Green  &  Co.  the  manager  of 
the  syndicate.  They  also  agreed  to  "withdraw 
from  sale"  all  bonds  allotted  to  them  until  the 
disbanding  of  the  syndicate.  This  gave  Lee, 


OUGHT  TO  KNOW  43 

Green  &  Co.  a  profit  of  5  points  on  all  the  issue. 
The  only  possible  loss  in  this  connection  could 
happen  in  case  their  proportion  of  the  syndicate 
allotment  could  not  be  sold. 

The  members  of  the  syndicate  agreed  to  sell 
these  bonds  at  98  to  the  general  public,  and  at 
no  other  price.  Each  member  of  the  syndicate 
had  a  list  of  regular  customers  who  were  eager 
to  get  the  bonds  at  98,  because  they  were  vouched 
for  by  such  well  known  firms.  In  addition  to 
this,  each  firm  had  a  corps  of  trained  bond  sales- 
men. The  head  of  the  sales  department  called 
these  men  in  conference,  distributed  to  them  all 
the  facts  and  figures,  and  then  lectured  to  them 
on  the  qualifications  of  this  particular  bond  issue. 
Every  phase  of  the  mortgage,  the  business  of 
the  company  and  the  peculiar  worth  of  the  loan 
for  certain  classes  of  investors  was  thoroughly 
dicussed.  Questions  were  asked,  and  the  head 
salesman  constituted  himself  as  a  prospective 
purchaser,  and  the  salesmen  attempted  to  sell 
him  the  bonds.  After  all  possible  questions  had 
been  settled,  these  men  were  sent  out  to  do  what 
they  could. 

After  the  prospects  had  been  seen  and  the  field 


44  WHAT  EVERY  INVESTOR 

of  regular  customers  thoroughly  covered,  the 
salesmen  were  called  in  and  the  syndicate  man- 
ager reported  to  the  firms  that  only  $1,000,000  of 
the  bonds  remained  unsold. 


The  Public  Offering 

The  advertising  and  publicity  campaign  was 
now  ready  for  the  final  distribution.  Announce- 
ments were  made  in  all  the  leading  daily,  weekly 
and  fortnightly  financial  publications  that  on 
September  1st  next,  the  books  of  the  various 
firms  composing  the  syndicate  would  close  for 
subscription  to  the  Phantom  Aero  Co.  5  per  cent, 
first  mortgage  bonds,  due  1942  at  $100.  Litera- 
ture about  the  company  was  sent  to  investors  all 
over  the  country,  and  the  advertising  followed  up 
by  attractive  articles  about  the, Phantom  Co.  On 
September  1st  the  books  of  the  syndicate  closed. 
The  syndicate  manager,  Lee,  Green  &  Co.,  made 
an  accounting  to  the  other  firms  of  the  syndicate, 
and  it  was  found  that  only  $250,000  of  the  issue 
remained  unsold.  This  amount  was  divided  pro 
rata  according  to  the  various  interests  in  the 
syndicate,  and  each  one  had  a  right  to  sell  the 
bonds  as  desired. 


OUGHT  TO  KNOW  45 

Who  Profited? 

The  reader  will  easUy  follow  the  various  items 
of  profit  which  grew  out  of  this  bond  issue.  In 
the  first  place,  the  Phantom  Aero  Co.  got  its 
money  at  once  in  one  block  without  any  trouble. 
In  the  second  place,  the  firm  of  Lee,  Green  &  Co. 
got  a  profit  of  5  points,  or  $50,  on  each  $1,000 
bond  sold  to  the  stockholders.  In  the  third 
place,  Lee,  Green  &  Co.  got  a  profit  from  the 
sale  of  the  remainder  to  the  syndicate  at  95.  In 
the  fourth  instance,  Lee,  Green  &  Co.  and  each 
other  member  of  the  syndicate  made  a  profit  sell- 
ing to  their  chosen  customers  at  98.  And  lastly, 
the  entire  syndicate  made  a  small  profit  in  addi- 
tion by  selling  to  the  general  public  at  100. 

The  Expenses 

The  expenses  were  quite  large,  and  probably 
amounted  to  at  least  3  points  on  the  total  issue 
of  bonds. 

In  the  first  place,  there  was  the  cost  of  investi- 
gating the  Phantom  Aero  Co.  These  investi- 
gators were  high  salaried  men,  and  the  incidental 
cost  of  travel  and  overhead  office  expenses  must 


46  WHAT  EVERY  INVESTOR 

be  included.  Then  followed  the  fees  for  the 
lawyers  and  the  fees  for  local  and  state  legal 
necessities.  Possibly  the  bonds  were  made  tax 
exempt  at  the  time  of  issue.  Thirdly,  the  print- 
ing for  the  temporary  certificates,  circulars  and 
agreements ;  next  the  advertising  cost  and  sales- 
men's commissions,  and  last  but  not  least,  the 
postage  and  so-called  incidentals. 

What  Happens  to  the  Bonds? 

It  is  the  custom  for  well  established  firms  to 
stand  back  of  their  bond  ventures.  Lee,  Green 
&  Co.  are  no  exceptions  to  this  rule,  and  they 
are  ready  to  buy  back  at  a  slightly  reduced  con- 
cession bonds  which  investors  desire  to  sell. 
Other  firms  enter  into  the  field  of  buying  and 
selling  these  bonds  so  that  a  "market"  is  estab- 
lished. It  may  be  that  the  firm  of  Lee,  Green  & 
Co.  desire  to  establish  a  more  desirable  "mar- 
ket," so  that  application  is  made  to  list  these 
bonds  on  the  New  York  Stock  Exchange.  The 
advantage  for  the  owner  by  such  listing  is  that 
the  bonds  become  better  collateral  for  loans. 
There  is  no  other  advantage  except  possibly  a 
little  closer  "market"  for  a  purchase  or  sale.  Some- 


OUGHT  TO  KNOW  47 

times  the  investor  is  better  off  if  his  bonds  are 
not  listed  on  the  New  York  Stock  Exchange. 
These  Phantom  bonds,  not  being  listed,  are  not 
the  football  of  speculation,  but  are  more  or  less 
protected  by  Lee,  Green  &  Co.,  whose  reputation 
is  at  stake.  They  may  have  passed  through 
hundreds  of  hands,  but  no  matter  who  has  had 
them,  the  money  is  being  loaned  to  the  Phantom 
Aero  Co. 

The  interest  has  been  paid  regularly,  and  in 
1942  the  holder  notes  that  the  principal  is  due. 
Each  year  of  the  twenty-five,  the  Phantom  Aero 
Co.  has  been  putting  aside  enough  out  of  earn- 
ings to  eventually  pay  off  these  bonds.  The  pro- 
portionate amount  involved  for  each  year  is 
mathematically  computed,  which  taking  accrued 
interest  into  consideration,  involves  a  problem 
quite  out  of  the  customary  mathematical  calcula- 
tions. At  the  date  of  expiration  the  Phantom 
Co.  pays  the  Standard  Trust  Company  the 
amount  of  the  mortgage.  The  mortgage  is  re- 
leased and  the  Standard  Trust  Co.  pays  off  the 
various  holders  of  the  bonds  according  to  the 
terms  of  the  original  indenture  on  the  bonds. 


48  WHAT  EVERY  INVESTOR 


CHAPTER   IV 

Gauging  Personality 

What  the  Investor  Should  Know  About  the 
Officers — Technical  and  Business  Skill 

PERSONALITY  enters  into  every  phase  of 
business  as  well  as  art  or  pleasure.  The 
Motion  Picture  Company  with  Charley 
Chaplin  or  Douglas  Fairbanks  as  a  star  has  a 
much  better  prospect  for  profits  than  a  company 
whose  actors  are  unknown.  But  even  with  these 
stars  to  get  the  business,  the  management  may 
lose  money  by  injudicious  salary  payments  and 
wasteful  stock  jobbing  propositions.  So,  in  every 
instance  the  research  work  'for  the  investor 
comes  to  the  same  end. 

Who  Is  Managing  the  Company? 

In  the  previous  chapter,  the  bond  issue  of  the 
Phantom  Aero  Co.  was  discussed.  The  ultimate 
reason  that  the  bonds  of  the  company  ware 


OUGHT  TO  KNOW  49 

accepted  by  the  investment  firm  and  sold  by 
them  was,  not  only  because  the  actual  business 
as  a  business  was  vouched  for  by  the  investiga- 
tors employed  for  the  purpose,  but  because  the 
investment  firm  believed  in  the  capabilities  and 
business  acumen  of  the  management.  President 
E.  P.  Ripley  of  the  Atchison  Railroad  once  had 
the  choice  of  positions  with  the  Rock  Island  Co. 
or  the  Atchison,  Topeka  and  Santa  Fe.  He  chose 
the  latter  and  the  Rock  Island  Co.  fell  into  the 
hands  of  managers  who  were  more  interested  in 
the  stock  market  part  of  the  business  than  the 
railroad.  The  Atchison  is  firmly  established  as  a 
good  investment,  while  the  Rock  Island  disinte- 
grated and  went  through  receiver's  hands. 

The  prospective  buyer  of  Phantom  Aero  Co. 
5  per  cent,  bonds  should  be  perfectly  satisfied 
with  the  men  who  are  managing  the  company. 
The  investor  has  one  piece  of  evidence  in  favor 
of  investing.  The  good  firm  of  Lee,  Green  & 
Co.  would  hardly  have  undertaken  the  under- 
writing of  the  issue  unless  they  were  satisfied. 
This  is  the  first  reason  why  the  prospective 
investor  should  consider  the  purchase  of  Phan- 
tom Aero  Co.  5  per  cent,  bonds.  But  he  should 
not  rest  with  the  bare  word  or  on  the  action  of 


50  WHAT  EVERY  INVESTOR 

the  Investment  Firm  without  personal  investiga- 
tion. The  following  analysis  of  a  corporation 
of  this  nature  was  suggested  recently  by  Prof. 
Charles  W.  Gerstenberg,  president  of  the  Amer- 
ican Association  of  Financial  Statisticians: 

"1.  What  is  the  integrity  of  the  management? 

"2.  Does  the  enterprise  possess  technical  skill ; 
are  its  processes  stabilized  and  improved  as  far 
as  technical  skill  can  take  them? 

"3.  Does  the  management  possess  business 
skill,  is  it  shrewd,  are  its  distributive  functions 
well  organized,  is  it  meeting  competition  success- 
fully? 

"4.  Does  its  management  possess  financial 
skill ;  has  it  committed  itself  in  the  past  to  finan- 
cial obligations  that  would  be  injurious  or  preju- 
dicial to  new  capital ;  has  it  mortgaged  the  future 
as  well  as  the  past  in  such  a  way  as  to  interfere 
unduly  with  future  expansion? 

"5.  Is  the  business  reasonably  free  from  legal 
interference  ?" 

Therefore,  without  going  into  the  intricate 
duties  of  the  trained  statistician,  let  us  see  what 
the  average  man  can  learn  about  the  bonds  of 
the  Phantom  Aero  Co.  and  its  management,  be- 
fore making  his  investment.  It  is  well  to  follow 


OUGHT  TO  KNOW  51 

the  outline  of  Prof.  Gerstenberg  in  summing  up 
the  results. 


The  Management's  Integrity 

The  prospective  investor  would  of  course  in- 
vestigate the  reliability  of  Lee,  Green  &  Co.  It 
would  be  definitely  established  in  his  mind  that 
unless  the  Phantom  Aero  Co.  was  a  good,  going, 
well  managed  concern,  its  bonds  would  not  be 
recommended  by  such  a  well-known  investment 
firm.  On  the  other  hand,  there  might  be  pos- 
sibilities which  would  determine  Lee,  Green  & 
Co.  to  undertake  this  issue,  which  would  not 
be  in  accord  with  the  judgment  of  the  individual 
investor. 

An  examination  of  the  personnel  of  the  Phan- 
tom Aero  Co.  discloses  the  following  officers : 

President,  John  Smith.  A  graduate  of  Har- 
vard, class  of  1890,  studied  law  and  later  a 
member  of  the  firm  of  corporation  lawyers, 
Eckert  &  Smith.  After  a  successful  career  be- 
came associated  with  Sword  Auto  Co.  as  its 
secretary  and  legal  adviser.  Was  instrumental  in 
reorganizing  a  number  of  defunct  industrial  con- 
cerns and  is  a  member  of  many  important  clubs. 


52 


WHAT  EVERY  INVESTOR 


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OUGHT  TO  KNOW  53 

Vice- President  and  General  Manager,  Abram 
Spencer.  Graduate  of  the  Massachusetts  School 
of  Technology  1900,  engineer  with  experience 
in  many  mechanical  products.  Inventor  of  note 
and  employed  by  the  U.  S.  Government  in  an 
advisory  capacity.  Has  written  various  articles 
for  technical  magazines  and  is  not  well  known 
except  to  those  who  are  in  his  immediate  pro- 
fession. 

Secretary-Treasurer,  Thomas  Brown.  Com- 
mon and  high  school  education.  Entered  busi- 
ness as  a  stenographer,  later  becoming  private 
secretary  and  confidential  man  for  the  great  N. 
H.  Muran,  founder  of  many  prominent  industrial 
corporations.  Is  very  well  known  among  finan- 
ciers and  is  credited  with  many  friends  and  busi- 
ness connections  in  the  New  York  financial  dis- 
trict. 

Directors.  Three  well-known  bank  officials, 
also  three  men  whose  names  are  fairly  well 
known  in  the  business  world  and  four  others 
who  are  directors  in  many  other  corporations. 

A  careful  reading  of  the  short  general  biogra- 
phies of  the  dictators  of  the  Phantom  Aero  Co. 
by  the  prospective  investor  would  establish  in 


54  WHAT  EVERY  INVESTOR 

his  mind  that  "Integrity"  is  one  of  the  main 
elements.  All  those  who  are  in  charge  have  had 
business  experience  in  varied  lines  of  endeavor. 
Some  of  them  may  have  had  failures.  So  much 
the  better  for  the  company.  If  a  leader  of  an  in- 
dustry has  experienced  one  or  two  failures  and 
he  is  known  to  be  honest  and  is  "Integrity  Per- 
sonified," he  will  be  all  the  more  capable.  He 
will  know  what  previous  mistakes  to  avoid. 

Processes  Stabilized— Technical  Skill 

It  would  most  certainly  seem  to  the  investor 
that  the  officers  and  directors  would  not  have 
been  men  to  offer  a  proposition  to  the  general 
public  unless  they  were  certain  that  they  knew 
how  to  manufacture  aeroplanes  and  motors. 
However,  even  men  of  this  type  may  be  deceived 
as  well  as  the  layman  investor.  An  inquiry  re- 
garding what  the  other  members  of  the  same 
trade  think  and  a  look  at  the  product  itself  from 
the  viewpoint  of  what  effective  service  has  been 
done  would  be  necessary. 

It  is  easily  discovered  by  the  investor  that  the 
Phantom  Aero  Co.  has  had  a  very  hard  time  to 
procure  just  the  right  kind  of  steel  with  which 


OUGHT  TO  KNOW  55 

to  construct  motors.  It  is  also  a  public  fact 
that  much  money  has  been  spent  on  experiments 
and  that  even  now  the  process  of  construction 
may  have  to  be  changed.  On  the  other  hand, 
the  planes  are  in  active  service  in  this  country 
and  the  consensus  of  opinion  in  the  general  trade 
is  that  they  are  the  best  made  in  this  country, 
although  they  do  not  reach  the  efficiency  of  the 
European  manufacturers.  The  deduction  for  the 
investor  is  that  the  element  of  chance  makes 
the  investment  not  nearly  so  good  as  it  other- 
wise might  be.  The  other  viewpoint  is,  "Some- 
one will  succeed  and  it  is  more  likely  the  Phantom 
Aero  Co.  than  any  of  the  ethers." 

The  processes,  therefore,  are  not  really  sta- 
bilized, but  how  about  the  technical  skill? 

Out  of  all  the  officers  and  directors,  the  vice- 
president  and  general  manager  Abram  Spencer 
is  the  only  one  having  what  might  be  called  a 
modicum  of  technical  skill.  At  first  glance,  there 
does  not  appear  to  be  a  real  expert  in  aero-manu- 
facture. Further  investigation,  however,  would 
reveal  that  the  consulting  engineers,  not  men- 
tioned in  the  catalogue  of  officers,  are  among 
the  best  in  the  world.  Men  formerly  with  the 
Wright  and  Curtiss  companies  and  experts  from 


56  WHAT  EVERY  INVESTOR 

abroad  are  on  the  salary  roll.  Without  such 
men,  the  investment  would  be  very  risky.  With 
these  men,  the  possibilities  for  profitable  busi- 
ness are  vastly  increased. 

Business  Skill — Competition 

A  resume  of  the  business  histories  of  the  offi- 
cers and  directors  easily  proves  that  each  of 
them  is  qualified  in  the  business  world.  The 
president  has  not  only  had  a  theoretical  training 
but  a  practical  training.  The  secretary-treasurer 
has  had  a  thorough  business  education  and  the 
directors  are  men  of  experience  and  known  abil- 
ity. There  seems  to  be  nothing  of  a  serious  ad- 
verse nature  in  the  study  of  this  element  and  it 
is  therefore  a  mark  in  favor  of  the  investment. 

The  competitive  feature  is  a  little  more  inter- 
esting and  is  not  so  favorable  for  the  investor. 
In  looking  over  the  comparative  records  of  other 
companies,  we  find  that  these  other  companies 
have  been  able  to  manufacture  planes  at  a  much 
less  cost.  Why  is  this  so  ?  Careful  investigation 
shows  that  the  purchase  of  raw  material  was 
made  by  the  others  at  less  cost  per  unit.  The 
competitive  companies  also  have  been  able  to 


OUGHT  TO  KNOW  57 

turn  out  more  machines  so  that  just  now  there 
appears  to  be  something  wrong.  Further  and 
closer  analysis  of  the  statement  shows  that  the 
working  capital  is  very  small.  It  is  therefore 
evident  that  a  bond  issue  would  help  to  solve  the 
problem. 

Does  the  Management  Possess  Financial  Skill? 

Looking  back  at  the  list  of  officers  and  direc- 
tors of  the  Phantom  Co.,  the  investor  notes 
that  the  secretary-treasurer  and  seven  of  the 
directors  are  either  practical  or  theoretical  finan- 
ciers. This  feature  is  quite  in  favor  of  the  com- 
pany and  would  be  a  factor  conducive  to  invest- 
ing in  the  company.  It  stands  to  reason  that 
these  men  must  necessarily  have  sufficient  ability 
to  carry  the  Phantom  Co.  through  serious  finan- 
cial difficulties. 

Committed  to  Financial  Obligations? 

Up  until  the  new  bond  issue,  outlined  in  the 
preceding  chapter,  of  this  series,  there  has  been 
no  definite  financial  policy  pursued  by  the  offi- 
cers and  directors.  The  company,  in  the  past, 


58  WHAT  EVERY  INVESTOR 

has  been  run  with  the  capital  gained  by  the  sell- 
ing of  shares  and  whenever  additional  working 
capital  was  needed,  it  was  borrowed  from  the 
banks  on  short  time  direct  notes.  The  general 
financial  policy  had  been  too  cautious  rather  than 
too  careless.  An  examination  of  the  quarterly 
reports  to  the  stockholders  also  shows  that  a 
comprehensive  system  of  accounting  exists  which 
has  been  properly  audited.  There  is  nothing  in 
the  statement  which  could  be  hid  from  the  aver- 
age investor  and  so  far  as  can  be  learned  there 
are  no  " jokers"  to  deceive  the  layman. 

The  initiative  of  the  directors  in  advising  a 
bond  issue  to  gain  more  working  capital  is  laud- 
able for  it  should  put  this  company  on  a  par  with 
its  competitors.  In  addition,  the  method  of  dis- 
tribution of  the  bond  issue,  its  sinking  fund 
clause,  and  the  assets  back  of  the  mortgage,  all 
are  in  its  favor.  So  far  as  this  statistical  ele- 
ment of  investigation  is  concerned,  the  investor 
has  everything  in  his  favor.  There  is  no  past  sin 
hanging  over  the  financing  and  if  the  business 
continues  to  prosper,  there  is  no  reason  on  the 
face  of  recent  financial  and  managing  ideas  to 
prevent  further  funding  schemes  which  will  not 


OUGHT  TO  KNOW  59 

interfere  with  the  present  issue.     The  company 
has  not  mortgaged  its  future. 

* 
Free  from  Legal  Interference? 

This  is  a  most  important  subject  for  the  pros- 
pective investor  to  consider.  It  is  most  fre- 
quently overlooked  by  investors  and,  if  nothing 
is  noted  in  the  records,  the  prospective  purchaser 
of  bonds  or  stocks  should  make  sure  of  this 
condition  through  the  investment  firm  bringing 
out  the  saleable  issues.  Any  manufacturing  com- 
pany whose  product  is  based  on  patents  needs 
a  thorough  examination. 

The  Phantom  Aero  Co.  did  not  have  original 
patents  but  purchased  them  from  former  con- 
cerns which  were  originally  consolidated  into  this 
one  company.  The  other  little  companies  were 
practically  driven  out  of  business  on  account  of 
necessary  expenditures  to  defend  their  patents 
both  on  the  form  of  plane  and  the  motors. 
These  suits  were  all  settled  before  the  time  of 
consolidation  with  the  Phantom  Co.  and  the  in- 
vestment firm's  lawyers  reported  to  the  Standard 
Trust  Co.,  the  mortgagee,  as  well  as  their  own 
firm,  that  court  records  were  clear  as  to  the  non- 


•60  WHAT  EVERY  INVESTOR 

infringement  of  the  other  patents  in  existence. 
Had  the  patents  of  this  Phantom  Co.  simply 
been  applied  for,  it  is  doubtful  if  any  money 
could  have  been  borrowed  in  the  investment  mar- 
ket. In  every  case  the  investor  must  investigate 
this  situation. 

We  have  now  gone  over  the  item  in  connection 
with  the  management,  both  from  the  intimate- 
personal  phase  to  the  general-impersonal  phase. 
The  investor  has  decided  that  while  there  is  a 
certain  amount  of  risk,  much  greater  than  an 
established  railroad  first  mortgage  bond,  yet  the 
men  who  are  managing  the  business  and  the 
quality  of  the  investment  firm  making  its  finan- 
cial offerings  is  of  such  excellence  that  an  in-» 
vestment  is  worth  while  for  the  successful  busi- 
ness man  with  a  surplus,  but  not  one  for  the 
widow  or  the  man  who  only  has  a  small  sum  to 
invest. 


OUGHT  TO  KNOW  61 


.       CHAPTER   V 

The  Bond  Circular 

What   It   Shows   the    Investor — What   Other 
Information  Should  Be  Sought 

YOU,  Investor,  have  received  the  bond  cir- 
cular of  Lee,  Green  &  Co.  describing  the 
Phantom  Aero  Co.  new  5  per  cent,  bonds. 
After  going  over  it,  what  conclusion  will  you 
reach?    Will  you  invest  in  these  bonds? 

In  previous  articles,  it  was  shown  why  these 
bonds  were  issued  and  also  how  they  were  of- 
fered to  the  public.  Information  had  also  been 
gained  about  the  personnel  of  the  company. 
There  is  now  before  us  the  circular- of  the  invest- 
ment firm  offering  this  investment  and  it  is  our 
duty  to  study  it  and  find  out  what  further  infor- 
mation is  necessary  and  what  should  be  con- 
firmed in  the  circular. 

Is  the  Equity    Sufficient? 

A  glance  at  the  ( last  balance  sheet  shows  us 
that  there  are  $5,000,000  in  securities  held  by  the 


62  WHAT  EVERY  INVESTOR 

« 

Aero  Co.  These  securities  are  probably  listed  at 
cost  price  and  it  is  very  doubtful  if  they  would 
bring  one-fifth  of  their  value  if  distributed  to 
the  bond  holders.  So  far  as  they  are  concerned 
the  importance  to  the  mortgage  is  negligible. 
There  is  therefore  left,  back  of  the  bond  issue, 
$10,000,000  book  value  in  property.  The  circu- 
lar tells  what  the  property  is  and  where  it  is 
located  and  this  fact  is  attested  to  by  the  ac- 
countants, but  the  investor,  to  get  complete 
knowledge,  should  incorporate  this  question  in 
his  letter  to  the  investment  firm  before  placing 
his  money  for  the  purchase. 


What  Becomes  of  the  Money? 

Any  one  loaning  money  is  vitally  interested  in 
what  the  borrower  intends  to  do  with  the  money. 
In  fact  he  is  entitled  to  know.  The  circular 
particularly  states  that  this  money  is  to  be  used 
for  the  extension  of  the  plant,  to  retire  the  short 
term  notes  and  provide  working  funds. 

It  has  been  demonstrated  to  the  stockholders 
that  the  Phantom  Aero  Co.  is  losing  by  heavy 
interest  payments  on  account  of  borrowing  cur- 
rent funds  from  the  banks.  There  is  no  objec- 


OUGHT  TO  KNOW  63 

tion  therefore  in  using  the  funds  for  this  pur- 
pose. The  lender  knows  also  that  in  addition  to 
the  equity  stated,  the  supplies  purchased  and  the 
finished  but  unsold  products  will  be  an  additional 
guarantee  back  of  the  mortgage. 

There  cannot  be  much  extension  to  the  plants 
with  the  proceeds  of  the  sale  of  these  bonds,  for 
after  the  short  term  borrowing  obligations  are 
satisfied,  the  remainder  will  hardly  be  sufficient 
for  further  property  extension. 

Will  the  Bonds  Be  Paid  When  Due? 

The  circular  distinctly  states  that  there  will  be 
a  sinking  fund  established  so  as  to  pay  off  the 
bonds  at  maturity,  when  they  are  due.  A  number 
of  financial  experts  of  five  or  ten  years  back 
believed  that  the  principle  of  refunding,  paying 
off  the  loan  through  the  issuance  of  a  new  one, 
was  the  better  plan.  Their  idea  was  that  by  the 
time  the  loan  was  due  the  company  would  be 
so  well  established  and  earnings  so  good  that  a 
new  loan  could  be  made  at  reduced  interest.  The 
Phantom  Aero  Co.  is  more  experimental  and 
in  addition  there  are  uncertain  financial  elements 
brought  about  by  the  world  war.  It  is  there- 


64 


WHAT  EVERY  INVESTOR 


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66  WHAT  EVERY  INVESTOR 

fore  more  advantageous  to  the  investor  to  have 
the  sinking  fund  in  existence. 

The  sinking  fund  puts  aside  each  year  4  per 
cent,  of  the  issue.  This  is  a  little  larger  than 
usual,  but  it  means  that  the  Phantom  Aero  Co. 
will  be  able  to  make  quite  a  little  income  from 
the  sinking  fund  interest.  It  is  a  better  financial 
arrangement  to  do  this  than  to  allow  for  the 
accrued  interest  on  this  fund  to  take  the  part  of 
the  ultimate  principal. 

Future  Mortgages  on  the  Property 

The  circular  clearly  states  that  this  is  the  entire 
issue  and  that  it  is  a  first  mortgage  on  the  prop- 
erty as  a  whole.  There  is  no  provision  for  any 
future  borrowing  which  will  affect  the  equity  be- 
hind this  loan.  There  is  nothing  said  in  the  cir- 
cular except  a  plain  statement,  of  facts.  If  there 
is  to  be  other  borrowing  in  the  future,  it  will 
either  have  to  be  on  a  second  mortgage  basis  or 
on  new  property  to  be  acquired  later.  The  book 
value  of  the  real  tangible  assets  is  shown  to  be 
$15,000,000.  If  the  $5,000,000  of  securities  held 
should  be  left  out  of  consideration  as  problemati- 
cal, there  yet  remains  $10,000,000  which  can 


OUGHT  TO  KNOW  67 

never  be  utilized  as  first  mortgage  equity  until 
the  present  loan  is  paid. 

The  circular  does  not  clearly  show  whether  the 
book  value  of  $10,000,000  is  an  inventory  after 
the  $6,000,000  depreciation  has  been  charged  off. 
(Note  earnings  figures  of  $2,000,000  depreciation 
a  year  for  each  of  three  years.)  If  the  ten 
millions  is  the  value  at  June  30,  1917,  it  is  most 
probable  that  it  is  carried  at  a  figure  arrived  at 
after  the  depreciation  had  been  charged  off 
and  is  not  the  total  of  original  purchases  at  cost. 


Interest  Payments 

Will  the  Phantom  Aero  Co.  be  able  to  pay 
the  interest  and  pay  its  quota  to  the  sinking  fund 
account  ? 

The  answer  to  this  question  depends  upon  the 
estimate  and  conclusions  reached  from  a  study 
of  the  past,  the  conditions  of  the  present  and  a 
guess  for  the  future.  Each  year  has  shown  an 
increase  in  gross  earnings,  as  noted  in  the  cir- 
cular, and  the  operating  expenses  have  increased 
also  but  in  an  orderly  and  fair  manner.  The 
circular  states  that  large  orders  have  been  re- 


68  WHAT  EVERY  INVESTOR 

ceived  from  the  government.  The  present,  there- 
fore, is  provided  for. 

The  future  can  only  be  judged  by  believing 
that  the  same  ratio  of  progress  will  be  main- 
tained. The  examination  of  the  officers  and 
directorate  has  convinced  the  investor  that  they 
are  to  be  trusted.  It  is  therefore  proper  to  sup- 
pose that  the  future  will  be  advantageous  to  the 
Phantom  Aero  Co.  It  is  inconceivable  that  the 
directors  would  permit  their  company  to  fall 
behind  either  in  new  ideas  or  in  business  get- 
ting. The  possibility,  of  course,  might  conceiv- 
ably be  that  new  patents  and  form  of  manu- 
facture might  be  invented  which  would  make  the 
Phantom  Co.  a  back  number.  This  is  possible 
but  hardly  probable.  From  this  viewpoint  the 
investment  is  reasonably  safe. 

Is  the  Yield  Sufficient? 

The  yield  problem  is  a  matter  of  choice  for 
the  investor.  A  5  per  cent,  yield  during  war 
times  when  good  bonds  are  cheap  is  not  too  much 
for  this  kind  of  an  investment.  In  fact,  it  is 
hardly  enough.  When  one  considers  that  Cen- 
tral Leather  Co.  1st  mortgage  5's  are  selling  be- 


OUGHT  TO  KNOW  69 

low  par  as  well  as  Southern  Pacific  convertible 
5's  due  1934,  it  would  seem  that  these  bonds 
should  yield  more  than  5  per  cent.  The  fact  is 
that  the  yield  is  hardly  attractive  enough  for  the 
average  investor  in  this  class  of  bonds.  On  the 
other  hand,  both  principal  and  interest  seem 
safe,  and  for  the  purpose  of  further  illustration, 
we  will  permit  our  investor  to  make  his  pur- 
chase after  he  has  had  a  letter  from  Lee,  Green 
&  Co.,  satisfying  him  by  their  answers  to  the 
questions  which  he  asks  them  about  their  circu- 
lar. 

New  York  City, 

Sept.  5,  1917. 
Messrs.  Lee,  Green  &  Co., 

640  Wall  Street, 

New  York  City. 
Gentlemen : 

I  have  received  your  circular  relating  to  the  new 
issue  of  5%  bonds  of  the  Phantom  Aero  Co.  If  the 
answers  to  my  questions  are  satisfactory,  I  will  ask 
that  you  permit  my  subscription  to  $10,000  face  value 
of  these  bonds. 

1.  Are  these  bonds  interchangeable  as  to  coupon  and 
registered?    The  circular  did  not  state  this  situation. 

2.  Kindly  let  me  know  the  cost  of  the  original  invest- 
ment in  the  various  properties  mentioned  in  the  circu- 
lar.     If   the   original   cost,    including  the  cost  of   the 
buildings,    approximated    within    two    million    dollars 
of  the  ten  million  in  Plant  Account,  the  equity  is  suffi- 
cient for  all  purposes  of  investment. 


70  WHAT  EVERY  INVESTOR 

3.  I  have  not  even  considered  the  item  of  patents  in 
the  mortgage.     They  are  of  course  valuable,  but   the 
account  shows  ten  million  for  this  item,  which  appears 
very  large.    It  makes  little  difference  to  me  as  a  lender 
whether  the  ten  million  charge  here  was  offset  by  a 
bonus  of  stock  to  the  original  inventors  and  incorpor- 
ators,  or  whether  it  is  offset  by  selling  the  stock  at  an 
original   discount.     I    merely  desire  to   know   this   out 
of  interest  or  curiosity. 

4.  Kindly  be  more  explicit  about  the  five  million  dol- 
lars in  assets  expressed  as  Securities  Owned.     Is  there 
a   possible    market    for    these   securities    or    would   the 
purchased  asset  of  the  controlled  companies  be  valuable 
only  to  the  Phantom  Aero  Co.  ?     A  statement  showing 
the  intrinsic  value  of  these  securities  with  further  ex- 
planation by  you  would  lead  to  suggestion  by  me  that 
I  increase  my  original  investment. 

5.  Please  send  me  a  list  of  names  of  the  prominent 
engineers    mentioned    in    the    Management    paragraph 
of   the   circular.     Are  these   men  truly  the  best  to  be 
employed    in    the    aeroplane    business    and    have    they 
long   term   contracts    with   the    Phantom   Co.?     Unless 
you  can  definitely  state  desirable  facts  about  this  por- 
tion   of    the    management,    I    would   not    care    to    risk 
my  money  on  this  loan. 

6  Has  the  stock  got  a  market?.  As  a  lender  I  am 
interested  to  know  what  was  done  and  is  being  done 
in  marketing  both  classes  of  stock.  It  will  give  me 
a  direct  line  on  those  interested  in  the  company  and 
also  give  me  a  working  basis  for  judging  the  man- 
agement as  a  whole. 

In  addition,  I  wish  to  know  if  it  is  your  intention 
to  list  these  bonds  on  the  New  York  Stock  Exchange, 
where  there  is  an  open  market,  if  I  find  I  need  to  sell 
them  at  any  time.  Or,  do  you  expect  to  stand  back 


OUGHT  TO  KNOW  71 

of  these  bonds  with  your  associates,  providing  the 
market  yourself  instead  of  permitting  the  issue  of 
bonds  to  get  entirely  out  of  your  control?  Either  sys- 
tem of  market  arrangement  is  satisfactory,  but  I  would 
prefer  not  to  have  the  bonds  listed  on  any  exchange. 

7.  The  item  of  Supplies  and  Finished   Planes  looks 
rather  large.     Are  these  orders  which  have  not  been 
filled,  or  are  these  planes  obsolete? 

8.  Why  was  it  necessary  to  borrow  so  much  on  this 
issue    when    there    remained    two    million    in    treasury 
stock  yet  to  sell?     I  judge  that  this  is  not  the  oppor- 
tune time  to  sell  stock  and  that  you  believe  that  it  is 
a   better   investment   for  the   Phantom   Co.   to  hold   it, 
therefore  getting  much  more  in  the  future. 

I  will  appreciate  the  answers  to  these  questions  and 
any  further  information  which  you  will  give  me. 
Very  truly, 

M.  R.  Investor. 

Having  decided  that  the  yield  was  sufficient; 
that  the  equity  is  satisfactory ;  that  the  Phantom 
Aero  Co.  is  likely  to  do  a  big  business  and  make 
much  more  money  than  in  previous  years;  that 
the  management  is  capable ;  and  that  the  terms  of 
the  issue  are  in  accordance  with  what  is  desired 
for  investment — M.  R.  Investor  purchases  the 
bonds  at  par. 


72  WHAT  EVERY  INVESTOR 


CHAPTER   VI 

Speculative  Bonds — Investment  Stocks — Defi- 
nitions— What  Is  in  a  Name? 

MR.  JOHN  K.  KING  was  in  the  structural 
bridge  business  in  Cook  County,  Illinois. 
He  had  succeeded  in  making  an  excel- 
lent living  and  had  put  aside  a  sturdy  surplus. 
One  day  the  Big  Men  held  a  meeting  and  de- 
cided that  it  would  be  advisable  to  buy  up  the 
King  plant.  John  K.  was  nearing  his  sixty-ninth 
year  and  decided  that  he  had  better  meet  the 
inevitable,  but  he  was  a  keen  business  man  and 
the  result  of  the  conference  was  that  he  had 
$500,000  cash  and  no  business. 

John  K/s  Observations 

What  to  do  with  the  $500,000?  During  the 
years  of  business  success,  John  K.  had  con- 
centrated all  his  efforts  on  his  own  business.  He 


OUGHT  TO  KNOW  73 

knew  how  to  make  money  in  that  business  and 
the  effort  had  been  strenuous.  He  thoroughly 
realized  that  he  could  make  money,  but  he  had 
never  had  any  training  on  the  subject  of  how 
to  keep  it.  The  surplus  accruing  from  the  busi- 
ness had  been  turned  over  and  over.  Now  that 
he  had  the  actual  cash,  he  experienced  stage 
fright.  He  appreciated  the  fact  that  the  man 
who  has  dollars  is  the  target  for  every  man  who 
seeks  dollars. 

The  problem  to  be  met  was  the  safe  invest- 
ment of  these  funds,  which  would  give  him  a 
good  income  during  his  remaining  years  and 
leave  the  principal  intact  for  his  two  sons,  who 
were  at  this  period  in  school.  John  K.  had  been 
a  widower  for  the  last  ten  years. 

It  is  never  too  late  to  learn.  Of  course  he 
had  the  superficial  knowledge  of  investment 
which  the  average  man  gets  in  daily  contact  with 
worldly  affairs  and  his  mental  observations  sum- 
marizing this  knowledge  were : 

"So  far  as  I  can  learn  there  are  but  five  meth- 
ods of  investing.  I  have  the  choice  of  savings 
bank  deposits,  bonds,  stocks,  investments  in  land, 
either  by  purchase  or  mortgage,  or  building  and 
loan  associations.  I  have  read,  sought  advice, 


74  WHAT  EVERY  INVESTOR 

and  investigated  on  every  side.  Each  kind  of 
investment  has  its  good  points  and  each  kind  has 
its  evils. 

"I  have  therefore  come  to  a  conclusion  which 
leaves  me  no  better  off  than  when  I  started.  I 
have  learned  the  terms  and  meanings  of  the  clas- 
sifications but  in  every  case  I  find  bad  as  well 
as  good.  In  plain  words  I  want  the  best  for 
investment  and  having  eliminated  all  classes  ex- 
cept bonds  and  stocks,  I  cannot  find  that  bonds 
are  better  investment  than  stocks  or  stocks  any 
better  than  bonds.  It  depends  on  the  individual 
case  and  there  is  absolutely  nothing  in  the  names. 
A  rose  by  any  other  name  would  smell  as  sweet. 

"My  good  friend  Jackson,  the  head  of  a  very 
conservative  investment  firm,  tells  me  that  I 
should  buy  bonds.  He  is  of  the  opinion  that  it 
is  much  safer  to  be  the  creditor  of  a  corporation 
than  a  partner.  But  my  judgment  tells  me  that 
this  is  not  always  true,  for  there  are  plenty  of 
creditors  who  never  get  their  money  back  and, 
on  the  other  hand,  there  are  plenty  of  partners 
who  never  derive  a  cent  from  their  participation 
in  the  business.  By  sound  reasoning  the  conclu- 
sion is  easily  reached  that :  Bonds  are  not  neces- 
sarily a  good  investment  because  they  are  called 


OUGHT  TO  KNOW  75 

bonds,  and  stocks  are  not  poor  investments  sim- 
ply because  they  are  called  stocks." 

What  the  Terms  Mean 

John  K.  King  decided  to  plot  out  in  as  few 
words  as  possible  the  elementary  definitions  of 
the  principal  forms  of  corporate  investments  and 
make  his  comparisons  to  lind  out  where  he  could 
get  the  best  investment  in  each  class.  With 
pencil,  note  book  and  some  technical  volumes,  the 
result  was  this : 

Bond — An  obligation  of  a  government,  a  municipal- 
ity, or  a  corporation,  secured  by  promise,  legal  ordi- 
nance or  mortgage,  to  pay  to  the  lender  interest  and 
principal,  when  due,  in  return  for  a  loan  to  said  gov- 
ernment, municipality  or  corporation. 

a.  First  Mortgage  Bond  is  one  which  constitutes  a 
first  lien  upon  the  property. 

b.  Second  and  Third  Mortgage  Bonds  constitute  sec- 
ond or  third  liens,  as  the  name  implies. 

c.'  Consolidated  Mortgage  Bonds  are  issued  to  take 
up  and  fund  the  various  prior  bonds.  They  can  become 
first  liens  when  prior  mortgages  are  retired. 

d.  Second  Consolidated  Mortgage  Bonds  are,  as  the 
name    implies,    subsequent    liens    to    the    first    of    their 
kind. 

e.  Income   Bonds   are   secured   by   mortgage   on   the 
income  of  a  corporation,  after  prior  claims  are  paid. 

f.  Collateral    Income    Bonds    have    a    protection    de- 


76 


WHAT  EVERY  INVESTOR 


pending  on  certain  securities  deposited  for  the  pro- 
tection of  the  principal — but  both  "e"  and  "f"  are 
hardly  more  than  promissory  notes. 

g.  Collateral  Trust  Bonds  are  issued  against  collat- 
eral or  securities  deposited  with  a  trustee,  who  may 
sell  the  deposited  collateral  to  redeem  the  bonds  if 


An  Investment  Stock 


conditions  are  not  fulfilled.  There  are  various  other 
forms  of  Collateral  Bonds  such  as  Convertible  Collat- 
eral Trust  Bonds.  The  average  investor  needs  a  Phila- 
delphia lawyer  for  these. 

h.  Debenture  Bonds.  These  cannot  be  definitely  de- 
fined. Sometimes  they  are  no  more  than  an  unprotected 
note  of  the  corporation  and  again  they  eventually  be- 
come first  mortgages  and  have  sinking  funds.  The 
value  depends  on  the  character  and  standing  of  the 
corporation. 


OUGHT  TO  KNOW 


77 


i.  General    Mortgage    Bonds    constitute    a    mortgage 
on  the  entire  system  or  plant.    Part  may  be  first  mort- 


A  Speculative  Bond 

gage  and  part  second  or  third.     The  value  must  be 
learned   from  a  complete  study  of  prior  mortgages, 
j.  Sinking  Fund  Bonds  may  be  of  any  class  of  mort- 


78  WHAT  EVERY  INVESTOR 

gages  and  imply  a  reserve  set  aside  each  year  to  pay 
the  principal  when  due. 

k.  Improvement  and  Extension.  Bonds  are  issued 
against  betterments,  additions,  etc.  The  investor  needs 
to  observe  caution  in  this  case.  While  they  may  be 
a  first  lien  on  extensions,  they  might  also  be  used  to 
cover  up  ''reckless  operating  expenses." 

1.  Car  Trust  Bonds  are  secured  by  mortgage  on  roll- 
ing stock  and  on  non-payment  the  owners  may  seize 
and  sell  the  cars  mortgaged. 

m.  Certificates  of  Indebtedness.  Trust  Company  re- 
ceipts, Receivers'  certificates  and  a  host  of  other  forms 
of  obligation  constitute  the  less  used  *and  less  known 
varieties  of  bonds. 

The  mania  for  issuing  different  kinds  of  bonds 
is  as  widespread  as  the  tulip  mania  once  was 
in  Holland.  The  exact  legal  status  of  different 
kinds  of  bonds  can  only  be  defined  by  the  law- 
yers. The  laws  of  the  various  states  affect  the 
same  classification  in  different  ways.  As  the 
eminent  writer,  Edward  Carroll,  Jr.,  says :  "Many 
bonds  partake  of  the  nature  of  several  classes — 
thus  a  First  Consolidated  Sinking  Fund,  a  Gen- 
eral Consolidated.  A  General  or  an  Income 
Bond,  where  no  second  mortgage  exists  on  a 
property,  may  be  practically  on  the  same  footing 
as  a  second  mortgage  on  another  property. 

Various  kinds  of  bonds  may  be  Convertible 
Bonds — they  may  be  converted  into  stock  at  a 


OUGHT  TO  KNOW  79 

certain  time,  at  a  certain  price  and  under  certain 
conditions.  Some  may  be  good  and  some  bad, 
depending  on  the  condition  of  the  corporation 
and  the  terms. 

John  K.  King  read  over  the  above  notes,  which 
he  had  made,  with  considerable  interest.  He  sum- 
marized them  as  interesting  but  not  conclusive. 
He  was  pleased  to  be  able  to  learn  the  various 
terms  and  definitions,  but,  as  he  said  to  himself, 
"I  do  not  see  how  these  definitions  are  going  to 
help  me  one  bit  in  selecting  an  investment;  for 
they  are  only  names  at  the  best  and  any  one 
name  may  be  just  as  good  as  another.  Let  us 
investigate  the  stock  form  of  investment." 

The  Forms  of  Stock 

The  second  part  of  the  note  book,  therefore, 
summarized  the  story  of  stocks  as  possible  in- 
vestments. As  in  the  case  of  the  bond,  the  defi- 
nitions were  set  down  as  a  basis  of  determination 
as  to  the  advisability  of  an  investment  of  this 
character : 


"What  is  stock?  A  share  of  stock  represents  an  in- 
terest in  the  business — not  as  a  bondholder,  who  is  a 
creditor,  but  as  a  partner.  The  more  shares  owned 


80  WHAT  EVERY  INVESTOR 

the  greater  is  the  owner's  proportion  in  the  business. 
In  actual  practice  the  small  shareholder  delegates  his 
vote  by  proxy.  Stock  is  never  a  lien  on  the  property. 
It  is  simply  the  right  to  share  in  the  profits  and  losses 
and  all  creditors,  of  any  nature,  must  be  paid  first. 

"Preferred  stock  primarily  means  a  form  of  owner- 
ship which  has  a  preference  over  all  other  classes  in 
the  payment  of  dividends.  This  sounds  well,  but 
there  are  cases  where  the  stockholder  fares  better  by 
holding  common  stock.  The  preferred  shares  may 
be  limited  as  to  the  amount  of  dividend  and  the  com- 
mon stock  may,  in  a  successful  company,  get  the 
largest  share.  Further  than  this,  the  common  holders 
may  have  the  privilege  of  voting — carrying  on  the  busi- 
ness— and  the  preferred  holders  may  be  deprived  of 
any  voice  in  the  matter. 

"There  are  second  and  third  preferred  shares  in  some 
corporations  whose  holders  get  dividends,  or  are  prom- 
ised them,  before  the  common  holders.  These,  in  like 
manner,  ma}'  be  limited  as  to  dividend,  or  may  have 
provisions  regarding  convertibility  into  other  forms 
of  corporate  stock.  The  value  of  all  preferred  shares 
may  be  impaired  by  placing  burdensome  mortgages 
on  the  company,  and  in  some  cases,  the  common  hold- 
ers only  have  the  right  to  vote  on  such  proceedings. 

"Common  stock  holders  are  the  last  to  participate 
in  any  distribution  of  profits  or  net  earnings.  v  In  ex- 
ceptional cases,  where  net  earnings  are  very  large  and 
a  limit  is  placed  on  dividends  to  anterior  issues,  the 
common  holders  get  the  greatest  share. 

"Assessable  and  non-assessable  stocks  are  forms 
which  the  very  names  designate  as  definitions.  As- 
sessable stockholders  are  often  liable  to  creditors  to  the 
amount  of  the  par  value  of  their  stock,  while  non- 
assessable shares  carry  all  the  privileges  but  no  Ha- 


OUGHT  TO  KNOW  81 

bilities  other  than  the  possible  loss  of  the  original  cost 
of  the  stock. 

"Cumulative  stock  is  often  worth  while.  Its  features 
of  interest  is  that  when  dividends  are  not  paid  as 
promised  they  accrue  as  obligations  before  the  com- 
mon stock  can  have  an  interest.  Crucible  Steel  pre- 
ferred and  Corn  Products  Preferred  are  examples 
of  securities  of  this  nature  which  paid  up  back  divi- 
dends. Non-cumulative  stock  improves  the  chances  of 
subsequent  shareholders.  It  a  preferred  stock  is  non- 
cumulative,  the  common  stockholder  has  a  better  chance 
to  participate  in  profits,  if  the  business  is  ultimately 
a  success. 

"Guaranteed  stock  is  usually  the  stock  of  a  company 
which  is  under  the  control  of  another,  the  latter  guar- 
antees the  payment  of  the  dividends.  The  name  sounds 
good  but  the  guarantee  is  only  as  good  as  the  sound- 
ness of  the  guarantor." 

Conclusion 

The  astute  and  careful  John  K.  King,  poten- 
tial investor,  studied  these  terms  and  definitions. 
What  had  he  best  do  with  that  half  million? 
The  very  first  consideration  was  to  forget  the 
definitions  and  terms  as  the  basis  for.  investment. 

Because  a  bond  is  called  "First  Mortgage" 
does  not  stamp  it  as  a  good  investment.  Because 
a  stock  is  "common"  does  not  stamp  it  as  a  poor 
investment.  Back  in  1908  Mr.  King  could  have 
purchased  Iowa  Central  First  Mortgage  4's  at 


82  WHAT  EVERY  INVESTOR 

81  and  refused  Sears,  Roebuck  &  Co.  common 
stock  at  40.  In  1917  Iowa  First  4's  are  selling 
at  45  and  Sears,  Roebuck  common  at  160. 

Never  invest  in  a  tipme.  Invest  in  a  security 
because  it  is  good,  no  matter  what  its  name 
may  be. 


OUGHT  TO  KNOW  83 

CHAPTER   VII 
How  to  Invest  a  Half  Million 

An  Investment  in  Each  Form  of  Bond — The 
Formula  to  Follow 

A   HALF  Million  Dollars  to  invest !     For  a 
retired  bridge  builder  like  John  K.  King, 
this  was  as  difficult  a  job  as  any  of  the 
problems  he  had  ever  met  in  business.     He  had 
studied  the  various   forms   of   investments   and 
learned  all  the  well  known  forms  of  bond  mort- 
gages and  was  no  better  off  than  before  except 
in  a  general  way. 

John  K.  had  been  a  specialist  in  his  own  busi- 
ness. He  realized  that  very  few  bankers  and 
brokers  would  be  able  to  build  a  cantilever  bridge 
across  the  St.  Lawrence,  and  his  sound  judg- 
ment followed  out  the  analogy  whereby  the  con- 
clusion was  reached  that  very  few  bridge  builders 
had  enough  training  to  -invest  a  half  million 
dollars.  There  are  specialists  in  the  bridge  busi- 
ness as  well  as  the  investment  business  and  John 
K.  shrewdly  appreciated  the  fact  that  most  bank- 


84  WHAT  EVERY  INVESTOR 

ers  and  investment  firms  had  something  of  their 
own  that  they  desired  to  sell.  This  individual 
phase  might  be  all  right  and  it  might  be  all 
wrong,  so  there  was  but  one  thing  left  and  that 
was  to  get 

Disinterested  Advice 

Every  investor  should  know  above  all  things 
that  statistics  and  opinions  are  best  when  mixed 
by  experts.  The  novice  can  miss  the  most  im- 
portant feature  of  a  report.  Net  earnings  may 
look  fine,  but  really  misrepresent.  The  Science 
of  Finance  is  just  as  difficult  as  the  Science  of 
Law,  and  yet  no  one  goes  to  court  without  ad- 
vice. John  K.  King  collected  all  his  data,  col- 
lated all  his  advice,  but,  before  he  made  the  first 
step  toward  purchase,  he  consulted  a  disinterest- 
ed Analytical  Bureau.  It  happened  that  the  Spe- 
cial Analytical  Service  Bureau  of  THE  MAGAZINE 
OF  WALL  STREET  received  the  order.  After  the 
elimination  of  many  suggestions,  the  securities 
of  the  accompanying  table  were  chosen  to  meet 
his  individual  needs.  He  well  knew  that  his  list 
might  not  be  satisfactory  to  the  widow  or  the. 
small  investor.  Each  must  solve  his  own  prob- 
lem according  to  his  individual  conditions. 


OUGHT  TO  KNOW  85 

Bond  Reports 

GUARANTEED  BOND— Allegheny  &  West- 
ern first  mortgage  gold  4  per  cent,  bond,  due 
Oct.  1,  1998.  This  railroad  was  chartered  in 
1898  as  a  consolidation  of  various  small  com- 
panies near  Pittsburgh,  Pa.  It  is  leased  for  the 
full  term  of  corporate  existence  to  the  Buffalo, 
Rochester  and  Pittsburgh  Ry.  Co.,  which  agrees 
to  pay  the  principal  and  interest  on  the  stock  and 
bonds.  It  is  a  first  lien  on  its  road,  equipment 
and  future  acquisitions,  holds  a  very  high  invest- 
ment rating  and  has  a  market  on  the  New  York 
Stock  Exchange.  The  road  itself  is  an  excellent 
property  and  the  guarantor  enjoys  a  further  high 
rating  as  a  railroad  company. 

SECOND  MORTGAGE  BOND— United 
States  Steel  Co.  sinking  fund  S  per  cent,  bonds, 
due  April,  1963.  These  bonds  are  as  well  known 
as  any  investment  in  the  United  States.  The 
sinking  fund  may  redeem  them  at  110  and  in- 
terest some  day  and  the  bonds  are  a  direct  obli- 
gation of  the  company  and  secured  by  a  lien  on 
all  the  property  subject  only  to  the  50-year  5  per 
cent,  bonds  of  1951,  known  as  the  Carnegie 
bonds.  The  whole  world  knows  the  success  of 


86  WHAT  EVERY  INVESTOR 

this  most  wonderful  industrial  company  and 
there  is  a  wide  margin  of  safety  in  earnings  for 
this  issue. 

DEBENTURE  BOND— General  Electric  Co. 
3-year  6  per  cent,  gold  notes,  due  July  1,  1920. 
The  General  Electric  Co.  is  in  remarkably  strong 
financial  condition,  and  would  be  justified  in 
paying  out  all  surplus  earnings  in  dividends. 
These  bonds  are  a  direct  obligation  of  the  com- 
pany but  are  not  f  secured  by  mortgage.  They 
are  securities  of  unquestioned  standing  and  pos- 
sess a  high  degree  of  safety.  They  were  brought 
out  by  Lee,  Higginson  &  Co.,  and  J.  P.  Morgan  & 
Co.,  and  were  heavily  oversubscribed. 

LAND  MORTGAGE  NOTES— Canadian  Pa- 
cific Railway  Co.  6  per  cent.  Note  Certificates, 
due  March  2,  1924,  are  a  direct  obligation  of  the 
company  and  secured  upon  a  "Special  Investment 
Fund,"  composed  of  deferred  payment  on  lands 
heretofore  sold  and  securities  in  which  the  pro- 
ceeds of  land  sales  have  been  invested  aggregat- 
ing $55,000,000,  and  the  outstanding  amount  is 
$52,000,000.  These  notes  are  backed  by  the 
credit  of  one  of  the  greatest  railroads  in  the 
world  and  the  redeemable  features  and  terms  of 
the  mortgage  are  very  satisfactory  to  the  lender. 


OUGHT  TO  KNOW  87 

FIRST  MORTGAGE  BOND— Wilson  &  Co. 
6  per  cent,  bonds  are  a  first  lien  on  the  property 
of  one  of  the  largest  packing  companies  in  the 
world.  In  1916  the  profits  available  for  interest 
on  these  bonds  were  over  five  times  the  require- 
ments and  for  the  present  year  the  earnings  are 
running  at  the  rate  of  about  ten  times  the  amount 
of  required  interest.  The  company  is  in  capable 
managerial  hands  and  the  market  for  the  bonds 
is  firm  and  remains  slightly  above  par. 

COLLATERAL  TRUST  BOND— American 
Telephone  &  Telegraph  5  per  cents,  are  a  new  is- 
sue and  are  entitled  to  exceedingly  favorable  rat- 
ing. These  bonds  have  passed  above  the  offering 
price  but  have  lately  declined  with  the  general 
market.  They  may  be  considered  one  of  the 
most  attractive  investment  bonds  in  the  market. 
The  security  is  above  adverse  criticism  and  they 
are  backed  by  the  greatest  public  utility  company 
of  its  kind  in  the  world  and  one  of  the  best  man- 
aged. There  would  have  to  be  a  revolution  in  the 
earnings'  decline  to  affect  this  issue. 

GENERAL  MORTGAGE  BOND  —  The 
Reading  Company  and  the  Philadelphia  and 
Reading  Coal  and  Iron  Co.  4  per  cents.,  due  Jan., 
1997,  are  given  the  very  best  investment  rating. 


88  WHAT  EVERY  INVESTOR 

The  mortgage  is  secured  upon  practically  the 
^entire  -property,  including  the  valuable  stocks  of 
the  coal  property.  There  are  a  number  of  prior 
liens  which  cannot  be  renewed  as  mortgages 
when  due  so  that  this  issue  eventually  becomes  a 
•first  mortgage.  Every  time  dividends  are  paid  on 
the  stock,  provision  is  made  to  apportion  an 
.amount  of  tax  on  coal  mined  as  a  sinking  fund 
.-for  these  bonds.  No  error  can  be  made  in  tnis 
^investment. 

IMPROVEMENT  BOND— New  York  Cen- 
tral 4  per  cent.,  Series  A  due  2013.  These 
bonds  are  secured  by  a  mortgage  on  certain  ex- 
tensions and  improvements  made  by  the  New 
York  Central  Railroad,  and  are  amply  secured  by 
a  50  per  cent,  surplus  valuation  of  the  prop- 
erty itself.  Their  distinction  lies  in  the  fact 
.that  the  New  York  Central  is  back  of  them  and 
although  there  have  been  recent  excessive  de- 
creases in  the  earnings  which  has  had  an  un- 
favorable effect  on  the  stock,  there  is  nothing  to 
warrant  a  conjecture  that  the  situation  will  ever 
-be  serious  enough  to  affect  these  or  other  bonds 
of  this  road.  This  issue,  while  not  of  the  first 
<class,  is  one  of  the  best  of  this  form  of  mortgage. 

GOVERNMENT  BOND— The  Liberty  Loan 


OUGHT  TO  KNOW  89 

4 

needs  no  comment.  It  is  the  best  investment  in 
the  world. 

DOUBLE  GUARANTEED  BOND— North- 
ern Pacific-Great  Northern  Joint  Guarantee  of 
Chicago,  Burlington  &  Quincy  Collateral  Trust 
4  per  cent.,  due  1921.  These  bonds  are  to  be 
considered  as  in  all  practical  ways  secure  and 
entitled  to  the  very  highest  investment  rating. 
The  two  most  prominent  railroads  not  only  guar- 
antee this  issue,  but  the  collateral  is  C,  B.  &  Q. 
stock  at  $500  stock  for  every  $1,000  bond.  The 
mortgage  contains  many  excellent  other  features 
to  prevent  impairment  of  this  lien.  Truly  a  re- 
markable investment! 

CONSOLIDATED  MORTGAGE  BOND— 
Pennsylvania  Railroad  4%  per  cent,  bond,  due 
Aug.,  1960.  These  bonds  are  partially  secured 
with  other  issues  on  1,404  miles  of  road  and  ap- 
purtenances in  Pennsylvania  and  309  miles  of 
leaseholds,  real  estate  securities,  etc.,  divided 
in  various  sections  throughout  the  entire  sys- 
tem. It  is  a  second  lien  on  some  parts,  a  third 
lien  on  others  and  still  a  fourth  lien  on  other  sec- 
tions. In  spite  of  the  diversified  character  of 
the  mortgage  it  is  one  of  the  strongest  mortgages 
of  the  greatest  of  all  railroad  systems,  as  it  is 


90  WHAT  EVERY  INVESTOR 

secured  on  the  old  main  lines  of  the  system  and  is 
protected  by  the  most  valuable  leasehold.  Its 
rating  is  as  high  as  can  be  given  an  investment. 

GUARANTEED  LAND  MORTGAGE— An 
investment  in  a  guaranteed  land  or  building 
mortgage  of  such  prominent  guarantors  as  the 
Lawyers  Title  Insurance  and  Trust  Co.  or  the 
Title  Guarantee  &  Trust  Co.,  on  a  5  per  cent, 
net  basis  to  the  investor  is  perfectly  safe.  Care 
should  always  be  taken  to  make  a  personal  in- 
spection of  the  property  itself,  except  where 
the  mortgage  is  in  participation  with  other  in- 
vestors. In  the  latter  event  the  investor  banks  on 
the  integrity  of  the  financial  concern  guarantee- 
ing the  mortgage. 

SAVINGS  ACCOUNTS  up  to  the  amount  of 
$13,200  may  safely  be  carried  in  five  or  six  dif- 
ferent banks  for  this  purpose  and  will  provide 
ready  cash  for  many  contingencies,  when  such 
cash  is  needed.  Of  course  in  times  of  stress,  the 
savings  banks  are  not  much  better  than  securi- 
ties as  to  safety,  but  they  provide  a  possibility  for 
use  of  immediate  funds  when  investments  are 
down  in  price  and  therefore  need  not  be  sacri- 
ficed as  the  savings  deposit  cannot  deteriorate. 


OUGHT  TO  KNOW  91 

The  Stocks 

The  following  stock  investments  for  John  K. 
King  were  carefully  selected  by  the  Analytical 
Service.  Space  does  not  permit  a  review  such  as 
Mr.  King  received  but  for  the  purpose  of  illus- 
trating how  every  investor  should  go  about  se- 
lecting, a  sentence  or  two  is  given.  To  follow 
John  K.'s  system  of  safety,  the  reader  should 
pick  out  the  salient  points  of  the  reasons  when 
using  them  for  his  or  her  individual  purposes. 

PREFERRED  STOCK— Southern  Railway 
Preferred  is  an  issue  which  is  more  likely  to 
come  into  its  own  after  peace  has  been  restored. 
Cessation  of  war  will  mean  a  resumption  in 
traffic  for  many  of  the  commodities  and  manu- 
factures which  prior  to  the  war  found  an  ex- 
port outlet ;  particularly  cotton  and  phosphate 
rock.  The  bulk  of  the  South's  cotton  plants  are 
located  along  the  lines  of  the  Southern  Railway 
system  and  it  needs  but  little  reflection  to  see  to 
what  extent  traffic  on  this  system  will  be  revived 
when  export  of  cotton  and  phosphate  is  re-es- 
tablished. 

Earnings  of  the  Southern  Railway*  system 
are  running  currently  at  a  rate  equal  to  about 


92  WHAT  EVERY  INVESTOR 

20  per  cent,  of  the  preferred  stock  and  7^  per 
cent,  on  the  common  stock,  these  rates  compar- 
ing with  15.56  per  cent,  and  5.28  per  cent,  re- 
spectively in  1916. 

PREFERRED  STOCK— Cities  Service  Pre- 
ferred is  a  conservative  investment  and  we 
should  recommend  that  you  buy  it  inasmuch  as 
you  are  primarily  interested  in  the  income  of  the 
stock.  There  is  no  reasonable  doubt  as  to  the  ul- 
timate safety  of  principal  and  income  on  this  is- 
sue. The  dividend  is  now  protected  by  a  large 
margin  of  earnings  and  there  are  very  strong 
equities  back  of  the  issue.  The  price  may  go 
lower  because  of  the  investment  conditions  which 
favor  higher  yields  on  securities  having  a  fixed 
rate  of  income.  But  you  may  buy  your  Cities 
Service  Preferred  without  uneasiness  as  to  its 
ultimate  position,  as  it  should  eventually  be  es- 
tablished at  a  level  materially  above  its  current 
quotation. 

PREFERRED  STOCK— Kansas  City  South- 
ern Preferred  paying  4  per  cent,  annually,  yields 
on  present  price  8  per  cent.  The  rate  has  been 
maintained  for  nine  years,  and  with  the  road  in 
a  flourishing  condition  there  is  no  prospect  of 
this  return  being  reduced.  The  stock  has  indi- 


OUGHT  TO  KNOW 


93 


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94  WHAT  EVERY  INVESTOR 

cated  earning  power  of  .13.68  per  cent,  for  the 
current  fiscal  year  based  on  the  returns  to  July 
31,  1917,  against  9.63  per  cent,  for  1916.  Oper- 
ating income  and  gross  revenues  show  similar 
large  increases  over  preceding  years,  while  ex- 
penditures show  no  such  ratio  of  increase  con- 
sidering the  abnormal  times  and  high  cost  of 
materials  and  labor.  We  are  impressed  with  the 
showing  of  this  road  for  the  past  few  years,  and 
it  seems  as  if  the  rehabilitation  program  begun 
in  1906  and  costing  something  over  $16,000,000 
has  been  completed  and  placed  the  road  on  a 
standard  base  throughout. 

PREFERRED  STOCK— American  Sugar  Co. 
Preferred  stock  should  retain  its  investment 
value  during  all  time.  While  it  is  true  that  the 
common  stock  need  now  be  regarded  as  a  war 
stock  and  is  subject  to  serious  speculative  fluctu- 
ations, yet  there  is  little  possibility  of  the  com- 
pany's business  ever  being  affected  to  the  extent 
of  impairing  the  7  per  cent,  paid  on  the  senior 
issue.  The  American  Sugar  Refining  Co.  owns 
a  majority  of  the  capital  stock  of  the  Iowa  Sugar 
Company,  one-half  of  the  capital  stock  of  the 
Spreckels  Sugar  Company  and  minority  interests 
in  the  stock  of  the  Alameda  Sugar  Company,  the 


OUGHT  TO  KNOW  95 

Continental  Sugar  Company,  the  Great  Western 
Sugar  Company  and  the  Michigan  Sugar  Com- 
pany. Of  these  the  Great  Western  Sugar  Com- 
pany has  made  the  best  showing  by  far.  It  is 
predicted  that  for  the  year  1917  in  addition  to 
the  regular  dividend  of  1^4  per  cent,  on  the  com- 
mon stock  this  company  will  pay  extra  dividends 
aggregating  $40  per  share. 

PREFERRED  STOCK  —  Bethlehem  Steel 
New  Preferred  8  per  cent,  stock  is  way  out  of 
line — it's  one  of  the  cheapest  stocks  on  the  list 
and  when  a  few  more  people  get  afraid  of  it, 
it  will  be  time  to  load  up.  It  was  publicly 
offered  as  high  as  106,  and  now  the  stock  walks 
the  street  with  no  place  to  go  at  94.  Off  in 
the  background  is  the  7  per  cent,  preferred,  tick- 
eted at  around  88  and  yielding  only  7.85,  as  com- 
pared with  the  newcomer's  return  of  more  than 
8.50.  The  new  8  per  cent,  preferred  is  not  only 
prior  to  the  7  per  cent,  issue  as  the  8  per 
cent,  issue  alone  is  cumulative  but  has  a  call  on 
the  common  B  stock  at  115.  It  has  back  of  it 
something  like  $500  assets  per  share  and  aver- 
age earnings  from  1912-1916  of  $104  a  share. 
It  may  go  lower,  but  you  will  want  to  tell  your 
children  how  low  you  bought  it  and  to  be  sure 


96  WHAT  EVERY  INVESTOR 

you  have  a  good  story,  buy  it  down  and  buy  it 
on  the  way  back. 

COMMON  STOCK— Consolidated  Gas,  Elec- 
tric Light  &  Power  of  Baltimore  may  be  regarded 
as  a  pretty  good  investment  at  around  present 
prices.  The  action  of  this  company  in  reducing 
the  price  of  electricity  and  at  the  same  time  in- 
creasing the  dividend  rate  from  7  to  8  per  cent, 
annually  reflects  the  strong  financial  position  the 
company  is  in.  Earnings  are  expected  to  show 
a  continued  increase  in  the  near  future,  inas- 
much as  the  company  has  not  yet  begun  to  re- 
ceive the  full  benefits  from  its  big  manufactur- 
ing developments  in  the  Baltimore  City  district. 

COMMON  STOCK,  National  Biscuit  Co.— 
This  company  has  been,  of  course,  tremendously 
handicapped  in  the  last  year  or  two  by  the  greatly 
increased  cost  of  raw  materials  entering  into  the 
manufacture  of  biscuits.  Peace  should  mean 
lower  prices  for  such  essential  products  as  lard, 
flour,  etc.  We  regard  the  stock  as  a  peace  stock 
and  it  may  be  purchased  now  by  an  investor 
who  is  willing  to  hold  it  until  a  return  to  normal 
conditions.  The  company  is  a  magnificently  man- 
aged concern  and  it  is  so  well  fortified  financially 
that  it  could  easily  afford  to  pay  dividends  out 


OUGHT  TO  KNOW  97 

of  surplus  for  some  time  even  if  it  did  not  earn 
them.  The  price  has  been  very  low  on  account 
of  unfavorable  conditions  and  liquidation  after 
the  death  of  the  former  president.  It  is  very 
much  of  an  investment  bargain  at  present. 

COMMON  STOCK— National  Enameling  & 
Stamping  is  most  attractive  from  a  semi-invest- 
ment viewpoint,  both  because  of  its  compara- 
tively low  selling  price  and  because  of  the  favor- 
able prospects  for  an  increase  in  the  dividend  rate 
or  the  payment  of  extra  dividends.  National 
Enameling  &  Stamping's  recent  expansion  has 
been  of  a  very  substantial  character  and  earnings 
of  the  company  show  a  wide  margin  over  divi- 
dend requirements.  The  company  is  now  earning 
at  the  rate  of  between  $30  and  $40  a  share  per 
annum  compared  with  $11  a  share  actually 
earned  in  1916.  Dividends  were  recently  re- 
sumed at  the  rate  of  $4  a  share  per  annum.  On 
the  basis  of  present  earnings  and  dividend  pay- 
ments here  is  a  wide  leeway  for  an  increase  in 
the  dividend  or  the  payment  of  extra  dividends, 
but  the  effect  of  Government  taxation  of  excess 
profits  must  be  taken  into  consideration  in  this 
connection. 

COMMON  STOCK— Woolworth  is  showing 


98  WHAT  EVERY  INVESTOR 

steady  increase  in  business  and  as  an  investment 
is  always  to  be  considered  fairly  secure.  How- 
ever, there  are  many  uncertainties  in  the  pres- 
ent situation  and  while  the  technical  position  of 
the  market  has  been  greatly  improved  in  anticipa- 
tion of  the  new  offering  of  Liberty  Bonds,  we 
expect  to  see  temporary  reactions  accompanying 
the  present  rally.  You  will  assume  little  risk  in 
buying  Woolworth,  but  we  think  it  quite  possible 
that  by  adopting  a  waiting  attitude  you  will  be 
able  to  secure  the  stock  somewhat  cheaper.  How- 
ever, inasmuch  as  you  are  investing  a  half  mil- 
lion in  funds  and  intend  to  hold  the  investments 
indefinitely  you  would  not  assume  any  serious 
risk  in  making  your  purchase  at  the  present  time. 
While  the  stock  is  acceptable  for  you  it  might 
not  be  as  acceptable  for  another  in  a  less  happy 
financial  position  than  yourself. 

COMMON  STOCK— Southern  Pacific  stock, 
paying  6  per  cent.,  appears  at  present  levels  to 
be  comparatively  low  in  price.  In  1910,  for 
example,  when  12.3  per  cent,  was  earned  on  the 
stock,  it  sold  up  to  138}4  and  did  not  go  below 
103J4.  In  1911  it  did  not  sell  under  104%  and 
in  1912  under  1031X.  Yet  earnings  at  the  present 
time  are  far  ahead  of  the  earnings  in  the  years 


OUGHT  TO  KNOW  99 

mentioned.  The  explanation  is  due,  in  the  first 
place,  to  the  fact  that  railroad  stocks  were  in 
much  more  favoi  in  those  years  than  they  are  at 
the  present  time,  and,  in  the  second  place,  to 
the  fact  that  the  war  has  caused  the  selling  of 
railroad  stocks  held  abroad. 

Southern  Pacific  stock  would  appear  to  be  sell- 
ing at  a  lower  price  than  it  is  intrinsically  worth 
and  can  be  regarded  as  an  attractive  long  pull  in- 
vestment. Its  6  per  cent,  dividend  looks  very 
secure. 

COMMON  STOCK— Northern  Pacific  is  a 
very  sound  investment  stock  and  you  are  justified 
in  holding  it  for  an  investment.  In  spite  of 
highly  increased  operating  and  maintenance 
costs,  under  which  all  the  railroads  have  been 
laboring,  Northern  Pacific  has  returned  an  oper- 
ating income  of  $14,201,694  for  the  first  six 
months  of  the  current  year  as  against  $12,959,- 
380  for  the  corresponding  period  of  1916.  The 
company  operates  through  a  very  rich  territory 
and  according  to  latest  reports  is  showing  con- 
tinued improvement.  The  stock  may  go  lower  in 
sympathy  with  the  general  weakness  in  the  mar- 
ket, but  the  road  is  in  a  strong  position  and  we 


100 


WHAT  EVERY  INVESTOR 


feel  sure  that  you  will  be  ultimately  able  to  value 
it  at  a  considerably  higher  price. 

John  K.  King's  analytical  reports  covered  two, 
three  or  four  letter  pages  for  each  security,  but 
only  the  bare  summary  has  been  used  here  for 
illustration.  Mr.  King  learned  to  pick  out  the 
facts  and  apply  them  to  his  individual  case  such 
as  each  investor  must  learn  to  do.  Throughout 
all  the  research  work,  John  K.  King  noted  that 
this  formula  was  observed: 

Safety  of  Principal 
Wide  Geographic  Distribution 
Wide  Industry  Distribution 
Income  A 

Stability  of  Price  -Real 

Marketability  Investment 

Desirable  Future 
Distribution  of  Classes  of  Credit 
(Bonds)  or  Partnership  (Stock) 


OUGHT  TO  KNOW  101 

CHAPTER    VIII 
The  Stock  Selling  Circular 

What    Constitutes    an    Investment — How    to 
Escape  the  Pitfalls  of  the  Prospectus 

t^-irir  T-JLL  you  please  give  me  a  letter  of  in- 
YY  troduction  ?"  a  young  man  asked  Mark 
Twain  some  years  ago. 

"But  I  do  not  know  you;  I  have  never  seen 
you  before,"  replied  the  great  man.  Nevertheless 
the  young  man  pleaded  and  urged  his  case  until 
Mark  sat  down  and  wrote  him  the  following  let- 
ter: 

"To  whom  it  may  concern:  I  know  nothing 
about  the  young  man  who  offers  you  this  letter, 
but  I  admire  his  nerve." 

This  is  a  letter  of  introduction  of  the  brokerage 
or  investment  firm  which  sends  you  a  letter 
about  a  speculation  and  terms  it  an  investment. 
As  you  read  this  article  thousands  of  Ameri- 
can citizens  are  opening  their  mail  and  reading 
the  story  of  the  "most  wonderful  investment  ever 


102  WHAT  EVERY  INVESTOR 

offered  to  the  public."  The  circular  is  printed  in 
two  or  three  colors  with  artistic  typography  and 
alluring  illustrations.  It  is  written  by  a  master 
of  the  English  language  and  it  cannot  fail  to 
attract  the  attention  of  the  average  business  man 
or  woman.  But  if  you  are  the  one  who  has  en- 
joyed the  reading  of  this  interesting  offer  of  the 
well-known  investment  firm  of  Jones  &  Smith, 
just  put  it  aside  for  a  moment  and  ask  yourself 
this  question : 

uls  this  an  investment?" 

You  know  that  you  cannot  afford  to  speculate. 
You  have  labored  too  hard  and  long  for  that 
surplus  to  lose  it  in  a  few  days  or  weeks  and 
you  desire  to  invest.  Therefore,  it  is  necessary 
that  you  conserve  this  hard  earned  surplus  and 
take  no  chances  with  it. 

You  wish  to  invest.  Are  you  sure  that  this 
blatant  prospectus  is  an  investment?  Do  you 
know  what  an  investment  is? 

What  Is  an  Investment? 

Readers  will  recall  Beriah  Sellers'  Infallible 
Imperial  Oriental  Optic  Liniment  and  Salvation 
for  Sore  Eyes — small  bottles  fifty  cents,  large 


OUGHT  TO  KNOW  103 

ones  a  dollar.  Average  cost,  five  and  seven  cents 
for  the  two  sizes.  Capital  needed  to  manufacture 
the  first  two  thousand  bottles,  only  one  hundred 
and  fifty  dollars.  There  are  millions  of  people 
in  the  world.  Everyone  will  need  a  bottle,  for 
nearly  everybody  has  opthalmia.  There's  mil- 
lions in  it!  Even  the  schoolboy  recognizes  that 
Col.  Sellers'  scheme  is  not  an  investment. 

Oils  and  mining  stock  ventures  offer  the  great- 
est inducement  for  stock  promotion.  It  is  there- 
fore among  this  class  of  offerings  that  the  great- 
est danger  to  the  public  lies.  Before  the  min- 
ister, the  small  retailer,  the  farmer  or  the  widow 
answers  the  advertisement  received  in  the  mail,  it 
is  very  necessary  to  repeat  the  following  sen- 
tences : 

"The  distinguishing  characteristic  of  a  specu- 
lation is  the  fact  that  its  value  depends  upon 
circumstances  which  cannot  be  known  because 
the  future  is  needed  to  reveal  them.  An  in- 
vestment, on  the  other  hand,  contains  no  'ifs'  or 
'provided'  or  'reasonable  certainties/  Its  value 
is  founded  upon  certainty.  A  speculation  is 
founded  upon  shifting  sands  of  probability  and 
supposition."  (Meade.) 

Also  read  over  the  following  questions  which 


104  WHAT  EVERY  INVESTOR 

appeared  in  an  editorial  of  the  Wall  Street  Jour- 
nal seventeen  years  ago  and  apply  them : 

1.  What  were  the  plants  able  to  earn  on  the 
average  for  the  five  years  preceding  the  combi- 
nation ? 

2.  What  would  this  amount  have  paid  on  the 
present  amount  of  stock? 

3.  How  much  have  expenses  been  reduced  by 
consolidation  ? 

4.  What  will  the  combination  have  to  earn  net 
to  pay  7  per  cent,  on  its  preferred  stock  ? 

5.  How  much  in  excess  of  that  amount  is  the 
company  earning  now? 

6.  What  is  the  amount  of  its  net  floating  debt  ? 

7.  How  is  the  floating  debt  secured? 

8.  Is  the  corporation  hampered  by  burdensome 
contracts  ? 

9.  Can  it  enforce  its  own  contracts  with  buy- 
ers? 

10.  What  is  the  extent  of  the  competition  en- 
countered ? 

11.  What  is  the  possibility  of  reducing  operat- 
ing expenses? 

12.  Is  the  management  in  every  way  compe- 
tent and  satisfactory? 

Now,  if  you  are  not  accustomed  to  the  study 


OUGHT  TO  KNOW  105 

of  investments  you  will  perhaps  say,  "What  good 
will  it  do  me  to  ask  all  these  questions,  for  when 
I  find  out  the  answers  I  shall  not  know  much 
more  than  I  did  before?" 

The  fact  of  the  matter  is  that  unless  you  are 
able  to  understand  these  questions  and  answers, 
you  have  no  right  to  invest  your  money  and  you 
should  be  careful  never  to  be  guided  alone  by  the 
circular  or  prospectus  of  any  investment  or 
brokerage  firm.  And  if  you  have  surplus  funds, 
you  are  not  true  to  yourself  or  your  dependents 
unless  you  do  learn  what  an  investment  is  and 
educate  yourself  in  all  matters  financial,  even 
though  this  education  is  elementary. 

The  Business  of  Investing 
Let  us  suppose  that  Mrs.  Jones  lives  in  Keo- 
kuk.  Her  husband,  who  was  a  druggist,  accu- 
mulated a  moderate  fortune  of  ten  thousand  dol- 
lars. He  died,  leaving  his  widow  with  one  child 
about  ten  years  of  age,  and  all  his  accumulated 
fortune  went  to  his  widow. 

Even  though  Mrs.  Jones  had  neglected  an  ele- 
mentary financial  education,  she  knew  enough 
to  refrain  from  going  into  the  shoe  business  on 
Main  street  of  Keokuk.  She  did  not  know  any- 


106 


WHAT  EVERY  INVESTOR 


11 

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OUGHT  TO  KNOW  107 

thing  about  the  shoe  business  and  would  not 
jeopardize  her  capital,  for  she  knew  of  no  means 
of  getting  it  back  if  lost. 

But  there  are  thousands  of  Mrs.  Joneses  all 
over  this  country  who  are  willing  to  "invest" 
their  capital  in  the  Acme  Oil  Co.  or  the  Bonanza 
Mining  Co.  simply  because  some  broker  (?) 
sends  them  an  attractive  circular. 

And  the  Business  of  Investing  is  a  thousand 
times  more  difficult  to  learn  than  the  business  of 
selling  shoes. 

In  the  former  chapters  of  this  book  the  writer 
has  endeavored  to  show  what  an  investment 
really  is  and  how  the  novice  should  go  about 
investigating  and  learning.  The  suggestions  have 
been  elementary  because  it  is  necessary  to  lay 
the  ground  work  of  first  principles.  It  is  this 
same  phase  of  education  which  the  incipient  in- 
vestor must  absorb  before  he  or  she  risks  one 
dollar. 

Educated  men,  even  in  the  ministry  and  law, 
will  study  the  theory  of  economics,  will  dig  into 
the  intricacies  of  bi-metallism  and  the  study  of 
the  gold  reserve,  but  will  "fall"  for  the  first 
attractive  circular  of  a  new  oil  venture  without 
knowing  one  thing  about  it.  Reader,  do  not 


108  WHAT  EVERY  INVESTOR 

imagine  that  you  are  above  this  class  of  citizen. 
Unless  you  know  the  elementary  psychology 
of  the  fake  stock  promoter,  you  are  not  insured 
against  loss. 

The  Safety  of  Principal 

No  real  investor  will  buy  a  security  whose 
value  is  in  any  way  doubtful.  The  stock  or 
bond  of  stable  value  is  the  only  kind  that  inter- 
ests him.  He  wants  to  feel  that  the  principal  is 
reasonably  safe  and  that,  barring  market  fluctua- 
tions or  world  wars,  he  may  sell  it  without  loss 
in  the  event  of  necessity.  If  he  is  satisfied  with 
the  safety  of  his  principal,  he  will  sacrifice  a 
large  return  in  interest. 

The  interest  return,  however,  must  be  based 
on  the  condition  of  the  times.  Back  in  1902 
anything  over  4^  per  cent,  was  taught  to  be 
on  the  verge  of  speculation,  but  today  different 
conditions  prevail  and  in  1917  there  were  excel- 
lent investments  yielding  from  6  to  8  per  cent. 
Therefore,  the  rate  of  interest  cannot  be  taken 
as  a  criterion  to  differentiate  between  an  invest- 
ment and  a  speculation. 

The  big  financial  institutions,  insurance  com- 
panies, banks  and  trust  companies  are  the  big 


OUGHT  TO  KNOW  109 

investors  of  this  country.  Executors  and  trus- 
tees, the  fiduciaries  who  hold  funds  for  others, 
are  also  big  investors.  These  big  investors  de- 
mand safety  before  any  other  consideration.  That 
must  be  your  first  thought  in  making  an  invest- 
ment— Safety ! 

The  Psychological  Appeal 

It  is  true  that  we  have  steadily  been  educating 
ourselves  in  financial  matters,  but  the  prevailing 
psychology  to  induce  an  investor  to  buy  stock 
in  a  speculation  is  the  same  today  as  it  was  in 
1902,  when  Edward  Sherwood  Meade,  Ph.D., 
wrote  : 

"Here  are  the  principal  inducements  offered  to 
the  speculator  in  every  new  enterprise: 

"Other  men  have  made  money  in  similar  enter- 
prises. Why  should  not  he  be  equally  fortunate  ? 
He  is  not  asked  to  gamble,  but  merely  to  in- 
vestigate an  industrial  opportunity  and  act  as  his 
judgment  directs.  He  is  carried  away  by  the 
prevailing  optimism  of  the  time,  and  he  is  ready 
to  listen  to  the  advocates  of  new  schemes  for 
getting  rich.  Other  people  are  making  money 
fast,  and  he  is  certain  of  his  ability  to  do  as 
well  as  they.  The  appeal  to  his  'judgment'  and 


110  WHAT  EVERY  INVESTOR 

his  'courage'  is  the  bit  of  flattery  which  is  often 
decisive,  and  the  final  outcome  is  that  the  man 
of  small  means  'invests'  $100,  $200  or  $5,000  in 
the  stock  of  a  new  company  in  the  confident  ex- 
pectation that  from  this  small  investment  he  will 
one  day  reap  a  fortune." 

The  chances  are  that  the  harvest  will  be  a 
ream  of  worthless  or  near-worthless  stock  cer- 
tificates. 

Speculator  or  Investor? 

This  series  of  articles  is  for  the  investor.  The 
speculator  has  his  individual  field  and  he  is  a 
great  asset  to  any  young  country.  It  is  a  doubt- 
ful question  which  is  the  more  beneficial  to  a 
growing  country,  the  speculator  or  the  investor. 
But  speculation  is  even  a  greater  science  than  in- 
vestment and  must  be  left  to  the  professional. 
Every  man  with  a  surplus  dollar  should  be  an 
investor,  but  the  speculator  is  a  specialist.  His 
gains  are  rightly  large  because  his  losses  are  in 
proportion.  The  speculator  must  be  in  a  posi- 
tion where  he  can  afford  to  lose;  the  small  in- 
vestor is  never  in  that  position. 

It  has  been  argued  that  it  is  beneficial  to  a 
country  to  have  speculative  experiments  tried  at 


OUGHT  TO  KNOW  111 

the  expense  of  the  venturesome.  This  argument 
may  or  may  not  be  right,  but  the  investor  can 
readily  see  that  the  only  way  it  should  affect  him 
is  to  evolve  an  investment  from  what  was  orig- 
inally a  venturesome  speculation. 

Continuous  Supervision 

There  is  another  well-known  psychological 
phase  about  the  investor  which  demands  com- 
ment. Once  an  investment  is  made  the  investor 
is  apt  to  forget  about  it. 

Outside  of  having  his  holdings  periodically  ex- 
amined and  judged,  there  is  much  that  every  in- 
vestor ought  to  know  to  help  himself.  Here  are 
a  few  of  the  suggestions : 

1.  If  a  stock,  have  it  transferred  to  your  name, 
or,  if  a  bond,  at  least  have  the  principal  regis- 
tered in  your  name.     If  this  is  done,  you  will 
be  the  recipient  of  all  notices  from  the  company 
and  will  be  able  to  study  developments.  You  will 
receive  proxies  for  voting,  reports  of  earnings, 
notices  of  special  meetings,  certificates  represent- 
ing valuable  "rights"  if  issued,  and  you  will  un- 
consciously compare  your  company  with  its  com- 
petitors. 

2.  Read  the  quotations  of  the  sales  of  your 


112  WHAT  EVERY  INVESTOR 

investments  as  often  as  they  are  shown  in  the 
newspapers  or  financial  publications.  The  fact 
that  a  big  change  suddenly  occurs  either  up  or 
down  in  your  investment  means  something  which 
is  likely  to  affect  its  value.  It  is  time  for  you 
to  get  after  the  facts  at  once.  Many  New  Haven 
Railroad  investors  never  noticed  the  drop  in  price 
of  their  stock  until  the  loss  had  become  serious. 
3.  When  you  are  mentally  satisfied  that  you 
have  made  an  honest  mistake  in  judgment  in  an 
investment,  do  not  deceive  yourself  into  thinking 
it  "may  come  out  all  right  some  day."  This 
plan  of  reasoning  is  much  like  the  man  who  plays 
solitaire  and  cheats  himself  to  make  the  cards 
come  out  right.  Switch  into  something  else  and 
the  chances  are  you  will  be  right  the  second  time, 
for  the  lesson  of  the  first  will  have  been  a 
liberal  education. 

Conclusion 

Whether  you  are  rich  or  poor,  if  you  are  an 
investor  or  need  to  be  an  investor,  educate  your- 
self before  making  the  first  step. 

Do  not  be  deceived  by  the  prospectus  or  circu- 
lar of  a  new  promotion.  Learn  to  develop  the 
character  of  a  professional  buyer  and  you  will 


OUGHT  TO  KNOW  113 

be  able  to  meet  the  Svengali  hypnotism  of  the 
stock  salesman  who  offers  a  speculation. 

Learn  what  an  investment  really  is.  Ask  the 
questions  which  have  been  outlined  in  this  article 
and  as  many  more  as  you  can  think  of  and  be 
able  to  understand  the  answers  to  these  questions 
and  to  pick  the  flaws  in  the  salesman's  reasoning, 
if  there  are  flaws. 

Do  not  become  a  speculator  when  you  are  by 
habit  and  position  an  investor. 

Keep  constant  track  of  your  investments. 


114  WHAT  EVERY  INVESTOR 

CHAPTER   IX 
Tricks  of  the  Unreliable  Broker 

New  Promotions — Ventures  Which  Are  Not 
Investments — How  to   Investigate 

stopped  and  looked  at  our  stockhold- 
ers,  some  surprised.  It  wasn't  quite  the 
kind  of  a  gang  we  supposed  had  been 
investing.  They  all  looked  like  poor  people; 
there  were  plenty  of  old  women  and  lots  of  young 
girls  that  you'd  say  worked  in  factories  and 
mills.  Some  were  old  men  that  looked  like  war 
veterans,  and  some  were  crippled,  and  a  good 
many  were  just  kids — bootblacks  and  newsboys 
and  messengers.  Some  were  working  men  in 
overalls,  with  their  sleeves  rolled  up.  Not  one 
of  the  gang  looked  like  a  stockholder  in  anything 
unless  it  was  a  peanut  stand.  But  they  all  had 
Golconda  stock  and  looked  as  sick  as  you  please." 
Such  is  O.  Henry's  description  of  the  investors  in 
a  fake  mining  scheme,  from  "The  Gentle  Graft- 


OUGHT  TO  KNOW  115 

er."  It  is  amusing  fiction,  but  is  it  so  much 
different  from  the  real  thing? 

A  Pitiful  Letter 

The  following  is  a  letter  from  a  woman  who 
did  not  have  very  much  to  lose.  If  she  lost  her 
little  capital  she  had  no  means  of  replacing  it. 
She  is  an  investor.  She  is  living  today  and  her 
letter  is  typical  of  thousands  of  others. 

"Dear  Sirs :  Messrs.  -  -  &  Co.,  —  Street, 

did  me  a  very  dirty  trick.  They  roped  me  into  buy- 
ing 5,700  shares  of at  1  9/16  on  a  margin. 

I  saw  they  did  not  buy  or  hold  the  stock  but  just  kept 
my  money,  and  as  they  said  I  had  nothing  for  my 
money  but  the  interest  "of  the  stock  and  them  for  my 
cash.  I  paid  up  the  margin  and  asked  for  my  stock 

als  3  100  shares —  stock  May  16th,  but  week 

after  week  they  would  not  send  me  my  stocks. 

"Then  Mr.  -  -  came  here,  164  miles,  to  see  me 

and  told  me  my stock  was  going  away 

down  and  he  advised  me  to  change  it  at  even  — 

and  take  —  — ,  a  stock  that  they  give  you  in 

two  minutes  after  they  force  you  into  buying  it.  They 
forced  me  into  buying  3,000  shares  one  day  before  I 
got  out  of  their  office  and  made  me  pay  cash.  Now 

they  say  I  sold  my  and  gave  Mr.  — orders 

to  buy and  have  kept  my  stock  and  sent  me 

-  stock  and  will  not  do  anything.  I  sent 
a  telegram  same  day  saying,  'Do  not  sell  my  

— stock;    for   I   knew  when   they  told   you   about   a 


116  WHAT  EVERY  INVESTOR 

stock  they  would  say  they  bought  3000  or  more  thou- 
sand shares  and  make  you  take  it  on  margin. 

"My stock  they  would  not  deliver  un- 
til they  got  the  rights  and  kept  them.  The  rights  were 
worth  $540,  but  they  won't  do  a  thing.  I  now  hold 

8,700   snares  —     -  and  they  kept  my  - 

•  stock.    What  would  you  advise  me  to  do?    Can 

I  sell  the or  is  it  a  real  thing  or  a  bunko  ? 

I  did  not  tell  them  to  sell  my stock  and 

above  all  to  buy  5,700  shares •  —     -  for  I  hated 

the  3,000  shares  I  had. 

"Kindly  advise  me  and  oblige." 

The  summary  of  the  advice  is :  First,  do  not 
attempt  to  invest  until  you  know  what  an  invest- 
ment is  and  then  get  the  opinion  of  experts 
before  taking  the  first  steps. 

Second,  read  and  educate  yourself  so  that  you 
can  invest  intelligently. 

Third,  do  not  become  the  cat's-paw  for  brokers 
who  are  not  brokers  but  probably  "fly-by-nights." 

Fourth,  in  this  particular  case,  complain  to 
the  police  department.  Also  get  an  attorney. 

Until  we  become  a  country  of  investors,  until 
we  establish  schools  showing  how  to  invest  and 
how  to  protect  what  has  been  earned  by  the 
sweat  of  the  brow  so  that  it  will  not  land  in 
the  bank  accounts  of  the  thieves,  we  have  not 
conserved  our  resources.  Public  schools  train 


OUGHT  TO  KNOW  117 

boys  and  girls  in  the  methods  of  business — how 
to  make  money.  Where  is  there  a  course  on 
how  to  keep  it? 

How  They  Do  It 

The  campaign  of  a  few  years  back  by  the 
larger  exchanges  to  get  rid  of  "bucket  shops" 
was  the  real  beginning  of  the  end  for  the 
crooked  broker.  From  that  point  on,  the  fakers 
reorganized  their  various  schemes  and  estab- 
lished offices  which  "apparently"  did  a  legitimate 
business.  If  one  of  these  firms  did  not  have 
sufficient  capital,  the  process  of  doing  business 
was  somewhat  as  follows,  of  course  with  varia- 
tions depending  on  circumstances: 

An  out  of  town  retail  grocer  notices  in  the 
daily  paper  that  the  oil  stocks  are  booming  and 
he  reads  tales  of  large  sums  having  been  made 
by  insiders  and  even  by  just  ordinary  people. 
He  has  no  brokerage  connections  and  the 
thought  enters  his  mind  that  he  should  profit  as 
well  as  others.  His  home  town,  or  city,  news- 
paper contains  the  advertisement  of  Smith  &  Co., 
who  tell  of  the  merits  of  some  prominent  oil 
stock  now  being  traded  in  on  the  "Curb."  Cor- 
respondence follows  and  our  grocer  friend  is  per- 


118 


WHAT  EVERY  INVESTOR 


OUGHT  TO  KNOW  119 

suaded  to  "take  a  flyer."     He  thinks  that  he  is 
"investing." 

A  check  for  $1,000,  which  should  have  been 
invested  in  good  5  or  6  per  cent,  baby  bonds, 
or  in  a  good  preferred  stock,  is  sent  with  the 
order  to  purchase  the  oil  stock.  Smith  &  Co. 
send  back  a  report  that  the  stock  has  been  pur- 
chased and  proper  entries  are  made  on  their 
books.  If  the  stock  goes  down,  actual  purchase 
is  made,  and  not  until  then,  but  purchase  is  not 
made  at  the  time  the  order  goes  in.  If  the  stock 
goes  up,  Smith  &  Co.  take  advantage  of  the 
grocer's  ignorance  and  suggest  that  he  switch  his 
"investment"  to  another  stock,  usually  oil  or  min- 
ing. This  second  stock  is  of  a  type  which 
the  firm  has  bought  up  by  the  ream  and  there  is 
plenty  of  paper  printed  to  look  like  real  certifi- 
cates. If  the  grocer  does  not  desire  to  make 
this  switch,  a  representative  of  the  firm,  whose 
personality  is  of  the  persuasive  kind,  takes  a  trip 
out  to  the  country  town  or  city  to  see  his  pros- 
pect. The  very  fact  that  a  representative  of  the 
firm  takes  the  trouble  to  make  this  trip  tickles 
the  vanity  of  our  grocer-investor  and  it  is  a  sim- 
ple matter  to  persuade  him.  Thus,  the  firm  of 
Smith  &  Co.  has  been  able  to  distribute  a  worth- 


120  WHAT  EVERY  INVESTOR 

less  security  through  the  brokerage  on  a  real 
security. 

Women  the  Prospects? 

Investment  education  is  only  beginning.  The 
Liberty  Loans  did  much  toward  this  education, 
but,  in  the  mean  time,  the  best  prospects  for  the 
"fly-by-night"  concerns  are  women.  The  appeal 
of  advertising  literature  is  such  that  women  have 
more  time  to  take  cognizance  of  it.  To  many 
of  them  investment  appeals  as  a  broader  field 
in  the  business  of  life,  and  they  are  eager  to 
learn  and  readier  than  the  average  man  to  take 
a  chance. 

Up  to  the  present  time,  the  women  who  have 
entered  the  brokerage  and  investment  business  as 
a  profession  have  been  of  the  highest  type  and 
they  desire  only  to  protect  their  own  sex.  But 
the  oily  salesman  of  undesirable  character  still 
exerts  his  energy  among  women  with  money  and 
it  is  unfortunate  that  he  is  able  to  succeed  so 
well. 

It  is  difficult  for  the  woman  with  a  husband 
to  attempt  the  management  of  her  own  financial 
affairs,  because  the  man  usually  feels  that  all 
such  matters  are  a  part  of  his  business  and  his 


OUGHT  TO  KNOW  121 

wife  should  not  attempt  to  interfere.  The  time 
is  coming  when  the  investment  of  family  funds 
will  be  discussed  in  family  conference. 

In  the  meantime,  no  woman  should  attempt  in- 
vestment or  become  connected  with  any  broker- 
age firm  in  a  business  way,  until  she  has  first  in- 
vestigated the  standing  of  the  firm  in  question. 
Furthermore,  whenever  an  order  has  been  placed 
for  the  purchase  of  securities  the  customer  should 
arrange  for  the  delivery  of  the  actual  certificates 
at  once.  If  the  firm  makes  excuses  which  are 
unreasonable  on  their  very  face,  the  matter 
should  be  placed  in  legal  or  post-office  hands 
without  delay. 

The   Stability  of   Investments 

Thousands  upon  thousands  of  good  solid  citi- 
zens think  of  oil  and  mining  stocks  as  invest- 
ments similar  to  railroad  and  industrial  bonds 
and  stocks.  It  is  certainly  true  that  wealth 
from  the  soil  should  be  classed  in  this  category, 
but  the  fact  remains  that  very  few  of  the  oil 
and  mining  securities  compare  with  rails  and 
industrials  in  the  matter  of  stability.  Standard 
Oil  securities,  Anaconda  Copper,  and  others  of 
like  character  are  in  the  minds  of  prospective  in- 


122  WHAT  EVERY  INVESTOR 

vestors.  The  illustration  of  United  Verde  Ex- 
tension selling  from  40  cents  a  share  to  $40  a 
share  is  the  incentive  for  others.  Not  so  very 
long  ago,  the  whole  country  was  deluged  with 
advertisements  about  .a  new  candy  business. 
These  circulars  pointed  out  the  attractiveness 
of  a  business  like  Huyler's.  The  whole  structure 
fell  to  the  ground.  Men  of  prominence  who  in- 
advertently lent  their  names  suffered  in  conse- 
quence. 

Years  ago  investors  listened  to  William  Pater- 
son,  whose  Darien  scheme  was  a  gigantic  swin- 
dle. French  kings  and  premiers  feted  John 
Law,  whose  Mississippi  Bubble  burst  with  awful 
violence.  All  England  listened  to  Sir  John  Blunt, 
whose  South  Sea  Bubble  wrecked  thousands  of 
fortunes  and  reputations  and  it  is  not  so  long 
ago  that  John  Keely  invented  the  Keely  Motor 
in  this  country  and  investors  from  Europe  came 
to  praise  it. 

Back  in  1906  private  cars  of  seasoned  finan- 
ciers  could  be  seen  rushing  to  Goldfield.  Soon 
after  Goldfield  Daisy  and  Goldfield  Consolidated 
were  actively  traded  in  on  the  New  York  Curb, 
while  the  San  Francisco  Stock  Exchange  had 
as  many  mining  stocks  listed  on  it  as  the  London 


OUGHT  TO  KNOW  123 

Exchange  had  world  wide  issues.  Many  of  the 
attractive  certificates  today  either  line  the  strong 
boxes  of  '"investors"  never  to  be  disturbed,  or 
they  have  been  sold  at  J^  cent  a  pound  to  be 
converted  into  paper  for  commercial  purposes. 

Back  in  1910  the  writer  was  in  Los  Angeles, 
the  new  oil  district.  Every  newsboy  and  ribbon 
counter  clerk  had  a  sheaf  of  oil  certificates  tucked 
away  in  the  hope  of  sudden  riches.  The  climax 
came  as  usual  and  as  it  always  will.  Most  of 
the  enterprises  were  fake  ones  and  were  con- 
ducted by  irresponsible  firms.  It  was  difficult  to 
discern  what  was  really  bona  fide. 

Many  newspapers  and  financial  publications 
are  eliminating  this  class  of  irresponsible  adver- 
tising from  their  pages.  It  is  true  that  the  begin- 
ning is  small  and  there  is  much  to  be  done.  But 
the  fact  that  there  is  a  beginning  means  some- 
thing better  for  the  big  army  of  future  investors. 

A  short  time  ago,  the  editor  of  a  newspaper  re- 
ceived a  special  delivery  letter  from  a  ''broker- 
age firm"  in  New  York  City.  The  letter  was 
received  just  before  going  to  press  and  con- 
tained the  advertisement  of  a  new  oil  company. 
''Take  this  advertisement  at  your  own  rates"  was 
the  message.  It  would  not  have  been  surprising 


124  WHAT  EVERY  INVESTOR 

if  the  country  editor,  not  knowing  financial  con- 
ditions, had  accepted  it.  If  he  had  printed  it, 
someone  in  that  little  town,  calling  himself  an 
investor,  would  probably  have  lost  hard  earned 
savings. 

While  you  are  reading  this  article,  certain  so- 
called  brokerage  firms  have  representatives 
throughout  the  United  States  selling  securities 
of  new  automobile  ventures.  The  salesmen  are 
well  dressed,  appear  affluent  and  are  wonderful 
"talkers."  No  one  knows  how  much  money  "in- 
vestors" will  throw  into  the  coffers  of  these  auto 
companies  which  may  never  be  more  than  incor- 
porations in  the  records  of  the  state. 

An  Illustration 

Here  is  an  example  of  a  mining  scheme  back 
in  the  early  seventies  and  the  analogy  holds  good 
to-day : 

Mr.  A. — ,  a  gentleman  having  some  connec- 
tions with  the  mining  interests  of  the  country,  and 
owning  a  claim  which  had  been  staked  out  on 
some  auriferous  ledge  in  Colorado,  being  natu- 
rally desirous  of  disposing  of  his  property  to  ad- 
vantage, would  go  to  some  "prominent  banker" 
for  the  purpose  of  negotiating  a  sale.  But  "prom- 


OUGHT  TO  KNOW  125 

inent  bankers"  are  not  in  the  habit  of  paying 
cash  for  property  two  thousand  miles  away.  Ac- 
cordingly a  proposition  would  be  taken  up  to 
make  the  claim  the  basis  of  a  stock  company, 
and  that  the  owner  convey  his  property  in  it  to 
the  company  and  receive  therefor  a  certain  sum 
in  cash,  say  $10,000,  to  be  paid  out  of  the  first 
subscriptions,  and  also  a  certain  number  of  shares 
of  the  stock. 

The  capital  might  be  two  million  dollars,  rep- 
resented by  shares  of  $50  each  or  40,000  in  alL 
An  assay  is  made  and  literature  sent  out.  Some 
wealthy  merchant  or  some  prominent  man  lends 
his  name  and  the  directors  are  also  "made  promi- 
nent" if  they  are  not  already  so.  Usually  these 
"big"  names  get  the  stock  at  $12.50  when  it  is 
offered  to  the  public  at  $25. 

Officers  and  a  name  are  selected.  The  pros- 
pectus in  excellent  topographical  detail  is  dis- 
tributed and  the  "investors"  have  a  chance  to 
subscribe  before  Nov.  10,  after  which  date  the 
books  close  and  "the  opportunity  is  gone  for- 
ever." Needless  to  say  the  stock  is  sold,  and 
after  a  fitful  spell  of  manipulation,  the  company, 
name  and  officers  drift  into  oblivion.  Of  course 
the  actual  claim  exists.  But  that  is  all. 


126  WHAT  EVERY  INVESTOR 

Conclusion 

The  former  chapters  in  this  series  have  en- 
deavored to  point  out  the  salient  points  of  an 
investment.  This  chapter  points  out  one  of  the 
nasty  features  of  brokerage  which  is  not  invest- 
ment and  never  will  be  investment. 

Readers  may  wonder  why  the  chapter  in  ques- 
tion appears  in  "What  Every  Investor  Ought 
to  know."  No  one's  intelligence  need  be  insulted 
when  the  big  estates  of  the  most  prominent 
financiers  we  have  known  contain  reams  of 
"cats  and  dogs."  Beware  of  the  insidious  stock 
salesman  and  the  irresponsible  brokerage  firm. 

Before  Answering  an  advertisement  apply  for 
information  to  a  responsible  source  of  informa- 
tion. 


OUGHT  TO  KNOW  127 


CHAPTER   X 

Record  Your  Wealth 

Transfer  Stock  to  Your  Name — Rent  a  Safe 
Deposit  Vault — Some  Pertinent  Examples 

THERE  are   hundreds   of   dangers   for  the 
man  or  woman  who  owns  any  kind  of 
wealth.     The  investor  must  learn  first  of 
all  how  to  gain  money,  then  he  must  study  twice 
as  hard  to  learn  how  to  keep  his  capital  intact, 
and  finally  he  must  observe  every  known  rule 
to  know  how  to  protect  the  certificates  which 
represent  his  wealth. 

There  are  three  elementary  methods  of  pro- 
tecting a  bond  or  stock  certificate.  The  first — 
and  riskiest — method  is  to  keep  it  about  one's 
person  or  home;  the  second  is  to  permit  the 
banker  or  broker  to  hold  it;  and  the  third  is  to 
use  a  safe  deposit  vault.  This  article  with  its 
various  illustrations  has  reference  to  the  two 
last,  and  common  sense,  methods. 


128  WHAT  EVERY  INVESTOR 

Case  1.     The  Negligent  Man 

Mr.  George  Brown  of  Chicago  invested  $200,- 
000  through  his  bank  and  had  the  securities 
shipped  to  the  bank  on  draft.  The  bank  officials 
were  not  well  informed  as  to  the  authenticity  of 
these  evidences  of  wealth,  and,  in  Mr.  Brown's 
presence,  placed  the  securities  in  his  vault.  At 
his  death  five  years  later,  the  administrators 
of  his  estate  found  that  $10,000  of  the  bonds 
were  registered  as  to  principal  and  had  never 
been  released.  The  original  owner  had  died.  It 
took  many  months  and  much  money  to  make 
these  bonds  salable. 

Case  2.     Neglect  to  Transfer 

Mr.  Jacob  Crowley  of  New  York  City  pur- 
chased 50,000  shares  of  Rex  Mining  stock.  He 
was  "taking  a  flyer" ;  the  company  was  a  pros- 
pect and  there  was  no  indication  of  any  such 
pleasurable  features  as  dividends.  At  no  time 
was  there  ever  a  thought  of  a  reason  for  trans- 
ferring these  shares.  Mr.  C.  gathered  his  roll 
of  certificates,  failed  to  examine  them  and  dug 
out  a  resting  place  in  his  safe.  He  had  pur- 


OUGHT  TO  KNOW  129 

chased  the  stock  ai  40  cents  a  share  and  was 
holding  it  for  80  cents. 

On  the  24th  day  of  March  the  directors  of 
Rex  declared  that  all  stockholders  of  March  31 
whose  names  were  on  the  company's  books  would 
have  the  privilege  of  subscribing  for  10  shares 
of  new  stock  for  every  hundred  shares  shown 
to  be  owned  on  the  books.  The  subscription 
price  was  30  cents.  The  stock  was  then  selling 
for  50  cents.  Mr.  C.  could  buy  5,000  shares 
at  30  cents  and  sell  for  50  cents.  A  profit  of 
$1,000.  Inasmuch  as  Mr.  Crowley's  name  was 
not  on  the  books  of  the  company,  he  did  not 
hear  of  his  windfall.  Some  one  else  got  that 
privilege.  It  was  never  claimed  and  the  $1,000 
was  lost  forever. 

Case  3.     The  Lost  Dividend 

Back  in  1907  the  Southern  Pacific  Co.  had 
preferred  shares.  Mr.  Walter  Green,  a  broker, 
held  100  shares.  There  was  a  demand  by  the 
"odd  lot"  firms  to  borrow  this  stock  against  sales 
for  which  the  actual  stock  was  not  at  hand.  Mr. 
Green  loaned  his  stock.  Later  he  called  it  in  and 
received  another  certificate  in  another  name.  He 


130  WHAT  EVERY  INVESTOR 

immediately   transferred  the.  new  certificate  to 
his  own  name.  t 

When  the  company  paid  its  final  dividend  Mr. 
Green  received  a  check  covering  200  shares. 
The  borrower,  or  the  buyer  to  whom  the  bor- 
rower had  delivered  the  first  100  shares,  had 
never  transferred  the  stock.  Ten  years  later  Mr. 
Green  still  retained  the  extra  dividend  and  there 
was  no  hope  of  ever  tracing  it  to  Mr.  Green. 
Some  careless  man  or  firm  had  neglected  the 
transfer. 


Case  4.     Neglect  to  Keep  a  Record 

A  wealthy  Mrs.  Ward,  residing  on  Riverside 
Drive,  New  York  City,  kept  her  securities  in  a 
safe  deposit  vault.  She,  however,  kept  no  rec- 
ord of  what  was  in  the  vault.  About  the  first 
of  the  month,  she  opened  her  security  box  to  clip 
some  coupons,  and  after  finishing  the  clipping, 
replaced  the  bonds  and  stock.  She  wore  a  rather 
long  veil  and  the  folds  caught  and  held  out  a 
one  thousand  dollar  Anglo-French  5  per  cent, 
bond  which  is  very  much  smaller  in  size  than 
is  customary.  Unknown  to  her  the  veil  carried 
this  bond  out  of  the  office  and  as  she  stepped  to 


OUGHT  TO  KNOW  131 

the  pavement,  a  gust  of  wind  blew  it  to  the  street 
where  it  was  soon  churned  into  an  unrecognizable 
mass.  She  never  knew  the  number  of  the  bond ; 
it  was  not  registered,  and  all  she  could  know 
was  that  she  had  purchased  the  bond,  but  could 
never  trace  its  disappearance. 

Needless  to  say  Mrs.  Ward  ever  after  kept  a 
full  record  of  what  she  owned  including  a  de- 
scription. 

Case  5.     He  Left  Securities  with  the  Broker 

Mr.  Henry  Leroy  of  New  Rochelle,  N.  Y.,  was 
a  wealthy  man  but  was  accustomed  to  increase 
his  wealth  by  a  series  of  speculations  through 
a  well  known  brokerage  firm.  Mr.  Leroy  was 
not  an  habitual  trader,  so  that  often,  after  a 
"campaign,"  he  left  a  credit  of  both  money  and 
securities — in  negotiable  form — with  his  broker. 

Now  all  good  and  reliable  brokers  make  it  a 
strict  custom  to  set  aside  the  securities  of  cus- 
tomers which  are  paid  for  in  full  and  left  for 
safe  keeping,  or  for  margin  when  needed.  These 
"good"  brokers  place  such  securities  in  an  envel- 
ope marked  as  the  "Property  of  Henry  Leroy" 
and  on  the  statement  rendered  thev  are  listed, 


132  WHAT  EVERY  INVESTOR 

"Held  for  safe-keeping."  But  Mr.  Leroy's 
brokers  were  not  of  this  "good"  type.  Mr.  L. 
did  not  insist  upon  this  method  of  business,  so 
that  when  X,  Y,  Z  &  Co.  failed,  it  was  discov- 
ered that  Henry  Leroy's  securities  had  been  used 
by  the  firm  and  were  thoroughly  tangled  up  with 
the  disaster.  It  was  a  costly  lesson  but  thou- 
sands of  other  careless  investors  -have  suffered 
and  will  suffer  in  the  same  manner. 

Case  6.     5000  Shares  of  Nipissing  Mines 

A  prominent  merchant  in  the  tobacco  business 
with  headquarters  in  New  York  City  presented 
5,000  shares  of  Nipissing  mines  to  the  cashier  of 
a  brokerage  firm  in  New  York  City  a  few  years 
ago.  In  all  there  were  100  certificates  ranging 
from  5  shares  to  100  shares. 

This  investor  had  not  transferred  the  stock 
and  had  neglected  to  collect  two  dividends 
amounting  to  about  $1  per  share  in  all.  The 
cashier  began  the  search,  getting  the  addresses 
from  the  company's  books.  After  ten  months' 
work,  he  collected  $4,200  of  the  $5,000  due  and 
the  cost  of  collecting  in  postage,  time  and  fees 
amounted  to  $100.  The  loss  was  about  $900. 


OUGHT  TO  KNOW  133 

There  was  absolutely  no  excuse  for  such  negli- 
gence. 

Case  7.     What  Happens  to  a  Non-Dividend 
Payer 

Mr.  Edward  Dayton  of  Salt  Lake  City  owned 
100  shares  of  Wabash  Railroad  stock  (common). 
Wabash  had  about  as  much  chance  of  paying  a 
dividend  as  Comstock  Tunnel  has  today.  Mr. 
Dayton  owned  a  drug  store  and  never  read  a 
financial  magazine. 

One  day  the  Wabash  R.  R.  drifted  into  the 
hands  of  a  receiver  and  the  registered  stock- 
holders were  so  notified.  Mr.  D.  was  not  a  reg- 
istered stockholder  and  he  did  not  hear  of  the 
trouble.  All  registered  holders,  or  those  holding 
endorsed  certificates,  were  permitted  to  pay  an 
assessment  and  get  into  the  new  company  up  to 
a  certain  date.  After  that  date  the  old  stock 
became  worthless  paper. 

Mr.  D.  now  holds  worthless  paper.  Incident- 
ally, there  are  a  few  who  did  not  pay  the  assess- 
ment when  Northern  Pacific  reorganized  years 
ago.  They  also  hold  worthless  paper.  Mr.  D. 
now  knows  that  it  is  better  to  be  on  the  books 


134  WHAT  EVERY  INVESTOR 

of  the  company  as  a  holder  of  stock  and  he  will 
get  all  the  announcements  sent  out  in  the  fu- 
ture. 

Case  8.     Keeping  Track  of  Dividends 

A  prominent  editor  of  a  nationally  known  pe- 
riodical, whose  business  acumen  is  recognized — 
or  was  recognized — by  his  friends  had  a  specula- 
tive account  with  a  brokerage  firm.  He  held  vari- 
ous issues  of  securities  and  accepted  the  state- 
ment from  his  broker  each  month,  just  as  he 
might  glance  over  the  headlines  of  his  newspa- 
per while  going  home  in  the  subway. 

Among  the  securities  was  American  Chicle, 
which  paid  a  dividend.  This  fact  was  over- 
looked by  the  broker's  clerks  and  nary  a  credit 
did  Mr.  Editor  get  for  these  dividends,  but  he  did 
not  suffer ;  for  he  never  knew.  Had  he  followed 
the  announcements  he  would  have  noted  the  ab- 
sence of  this  item  at  once  and  held  his  broker  for 
it.  Of  course  the  broker  was  responsible  for  the 
collection  in  this  case. 

Case  9.     A  Forgery  Case 

A  clerk  in  a  New  York  Trust  Co.  gained  ac- 
cess to  the  blank  certificates  of  a  prominent 


OUGHT  TO  KNOW  135 

corporation  whose  stock  is  listed  on  the  New 
York  Stock  Exchange.  He  rilled  these  blanks 
out  to  John  Jones,  endorsed  Jones'  name  and 
forged  the  signatures  of  the  transfer  agent  and 
registrar.  He  took  the  certificates  to  Philadel- 
phia and  borrowed  80  per  cent,  of  their  value, 
about  $25,000,  and  left  for  South  America. 

During  the  course  of  business  one  of  these 
certificates  fell  into  the  hands  of  a  bona  fide  in- 
vestor, Mr.  Gerald  Nelson,  who  sent  the  certifi- 
cate to  the  company  to  be  transferred  to  his 
name.  The  records  showed  that  there  was  no 
John  Jones  and  that  more  than  the  authorized 
capital  of  the  company  had  been  issued. 

The  forgery  came  to  light  and  Mr.  Nelson  was 
able  to  recover  back  to  the  original  lender.  Had 
he  not  transferred  the  stock  at  once  the  compli- 
cations would  have  been  serious.  Has  any  reader 
a  forged  certificate  not  as  yet  transferred  to  his 


Case  10.     He  Lost  His  Stock 

A  Buffalo,  N.  Y.,  investor  bought  100  May 
Department  Stores  and  paid  for  it.  He  carried 
it  in  his  pocket  preparatory  to  placing  it  in  his 


136  WHAT  EVERY  INVESTOR 

safe  deposit  box,  but  did  not  transfer  it  to  his 
name.  He  did  one  sensible  thing:  he  jotted  down 
the  number  of  the  certificate  in  his  memorandum 
book.  While  walking  along  the  street,  he  acci- 
dentally jerked  it  from  his  pocket  and  did  not 
at  once  notice  the  loss.  The  discovery  was  made 
at  the  vault. 

Under  ordinary  circumstances  the  replacing  of 
this  certificate  is  serious  and  sufficient  trouble 
even  if  registered  in  his  own  name,  but  the  situa- 
tion became  complicated.  He  learned  the  name 
of  the  registered  holder  who  lived  in  Cincinnati. 
It  was  necessary  to  get  a  full  release  from  this 
man  to  himself  of  that  particular  certificate  and 
the  legal  red  tape  is  Gordian  Knot-like. 

Suppose  the  registered  owner  had  left  for  parts 
unknown  or  had  died?  Will  any  rightminded  in- 
vestor take  a  chance  like  this? 

Case  11.     Texas  Co.  Rights 

A  Chicago  customer  of  a  large  brokerage  firm 
owned  100  shares  of  Texas  Co.  stock.  Nearly 
every  year  this  company  increased  its  capital  and 
the  holder  of  the  stock  received  a  certificate 
showing  that  he  had  the  right  to  subscribe  for 


OUGHT  TO  KNOW  137 

new  stock.     Sometimes  the  sale  value  of  such 
right  amounted  to  30  dollars  per  share. 

This  customer  slept  peacefully  and  never  knew 
he  could  claim  these  rights  until  market  condi- 
tions had  lowered  the  price  of  the  stock  and 
consequently  the  value  of  the  rights.  This  ex- 
ample happens  daily  to  many  hundreds  of  in- 
vestors who  fail  to  transfer  their  stock. 

Case  12.     A  Letter  from  a  Cashier 

"Last  Monday  a  customer  called  us  on  the 
'phone  asking  why  he  did  not  receive  a  dividend 
on  an  odd  lot  of  stock  bought  around  the  latter 
part  of  September,  which  sold  ex-dividend  the 
first  part  of  October.  The  dividend  was  paid 
about  the  last  of  that  month.  Upon  our  asking 
him  to  look  at  the  certificate  and  let  us  know- 
in  whose  name  it  was,  he  reported  the  name  of 
a  firm  well  known  in  the  brokerage  business. 
He  had  assumed  that  because  he  bought  the 
stock  that  it  would  be  in  his  own  name.  (And 
this  man  called  himself  an  investor!) 

"Our  second  case  was  an  individual  who  had 
purchased  a  non-dividend  paying  stock  years 
ago  which  stood  in  the  name  of  a  firm  which 


138  WHAT  EVERY  INVESTOR 

had  liquidated  its  affairs  and  closed  up  over  a 
year  ago.  This  man  was  pressed  for  funds  but 
the  stock  was  not  a  'good  delivery/  not  acceptable 
to  the  buyer  under  the  circumstances,  and  the 
man  was  compelled  to  go  without  his  money  until 
all  legal  complications  were  cleared  away.  His 
suffering  and  inconvenience  might  have  been  in- 
tensified, had  the  transfer  office  been  in  Arizona 
or  had  he  been  unknown  to  the  firm  through 
which  he  sold  the  stock." 

In  Conclusion 

While  the  names  used  are  fictitious  yet  the 
principles  set  forth  are  only  too  true  and  will 
happen  time  and  time  again  unless  the  investor 
observe  the  fundamental  rules  of  self  protec- 
tion. The  investor  who  pays  for  his  stock  and 
who  does  not  transfer  it  to  his  own  name  is  no 
better  than  the  householder  who  goes  to  At- 
lantic City  for  the  week-end  forgetting  to  close 
or  lock  the  front  and  back  doors  or  the  windows 
of  his  home,  where  the  silver  and  valuables  are 
tempting  bait  for  the  first  unscrupulous  citizen 
whose  eyes  turn  that  way. 


OUGHT  TO  KNOW  139 


CHAPTER    XI 

Gossip   and  Its  Value 

How  Much  Value  Newspaper  Items  and 
Brokers'  Gossip  Has — A  Formula  for  Ask- 
ing Questions 

A  SUCCESSFUL  business  man,  once  upon 
a  time,  found  it  necessary  to  consult  a  fa- 
mous lawyer.  The  case  was  one  which 
involved  technical  terms  and  hinged  on  judicial 
decisions  of  an  intricate  nature.  The  lawyer 
questioned  his  client,  cross-examined  him  and 
recross-examined  him.  He  then  formed  a  two 
thousand  word  hypothetical  question  and  gave 
the  answer.  The  client  allowed  his  mind  to 
wander  during  the  discourse  because  he  could 
not  follow  the  peculiar  and  specialized  language 
of  the  legal  profession.  After  the  lawyer  had 
used  about  $200  worth  of  legal  time,  he  reached 
a  conclusion.  The  client  realized  that  the  legal 
train  had  reached  a  station  but  he  did  not  know 


140  WHAT  EVERY  INVESTOR 

the  name  of  the  station,  so  he  asked,  "Have  I 
any  chance  of  winning  this  case?" 

The  investor — the  average  investor — is  not  one 
whit  different  from  the  above  mentioned  business 
man.  All  he  wants  to  know  is  whether  his  pros- 
pective investment  is  the  right  one  for  him  to 
make,  or  the  wrong  one  for  a  man  of  his  cir- 
cumstances. The  language  of  finance  is  just  as 
confusing  as  the  language  of  law.  Many  of  the 
books  which  are  written  by  experts  in  finance 
are  thoroughly  impossible  to  the  average  inves- 
tor. 

"Newspaper  Dope" 

It  is  remarkable  how  many  people  always  be- 
lieve what  they  read  in  the  newspapers.  All 
news  is  made  presentable  and  in  giving  it  this 
dressing  the  salient  point  is  often  lost  or  mini- 
mized. Sometimes  a  paragraph  or  a  column  in 
the  newspaper  could  easily  be  boiled  down  to 
five  lines.  Many  reporters  are  paid  space  rates. 

Financial  news  as  printed  in  the  very  best 
general  newspapers  is  treated  in  the  same  man- 
ner as  the  story  of  John  Smith's  wife  running 
off  with  John's  chauffeur.  The  writer  recently 


OUGHT  TO  KNOW  141 

went  through  a  file  of  clippings  covering  the 
past  two  years  of  Curtiss  Aeroplane  Company's 
history.  Rumors  were  stated  as  facts.  State- 
ments of  officials  were  printed  without  being 
checked.  One  article  reported  millions  of  Gov- 
ernment orders  and  another  reported  none.  If 
you,  Mr.  Average  Investor,  had  invested  your 
funds  on  this  news — as  many  do — you  would 
have  either  made  a  million  dollars  or  gone 
broke.  In  either  case  you  could  have  reached 
the  same  result  by  going  at  it  blindly. 

Most  financial  writers  hedge  in  their  fore- 
casts. After  you  have  read  the  article,  you  deter- 
mine that  Brown  in  the  Express  thinks  the 
market  is  going  up.  It  goes  down.  You  write 
Brown  a  letter  of  criticism  and  make  fun  of 
his  judgment.  Brown  shows  you  where  he  said 
"something"  in  that  very  article  which  you  over- 
looked which  meant  that  the  market  was  more 
likely  to  go  down.  Then  you  feel  that  you  have 
made  yourself  ridiculous,  but  it  does  not  pre- 
vent you  from  believing  in  the  Owl. 

BTfore  you  make  any  investments  based  on 
financial  news  as  appearing  in  the  daily  papers, 
get  a  back  file  and  chart  out  the  predictions 


142  WHAT  EVERY  INVESTOR 

and  statements.     Then  see  how  they  fit  in  with 
what  actually  happened. 

Do  not  base  your  investments  purely  on  news- 
paper predictions  or  suggestions.  Check  them 
up  with  the  formulae  which  close  this  article. 

Stock-Brokers'  Suggestions 

The  man  who  represents  his  firm  on  the  Stock 
Exchange  is  deemed  by  the  layman  to  have  "in- 
side'' information  which  is  very  valuable.  There 
may  be  some  brokers,  whose  daily  business  it  is 
to  execute  orders,  who  also  have  a  good  knowl- 
edge of  investments.  Certain  clients  have  been 
hunting  for  many  of  these  "investment  special- 
ists" for  years  and  have  metaphorical  double- 
barreled  shot  guns  to  use  when  they  meet 
them.  Just  stop  and  think,  Mr.  Average  Inves- 
tor, and  ask  yourself  how  these  brokers  who  are 
buying  and  selling  all  day  long  can  have  time 
to  study  real  investment  conditions.  The  mem- 
ber brokers  have  too  close  a  perspective.  They 
are  like  men  standing  close  to  a  wall.  They 
can  only  see  a  few  square  inches  of  it  and  not 
the  whole  wall. 


OUGHT  TO  KNOW  143 

The  stock  broker  is  not  usually  the  best  man 
to  ask  about  investments.  His  speculative  acu- 
men may  be  above  par,  but  there  is  a  wide  dif- 
ference between  investment  and  speculative 
knowledge.  There  are  some  stock  brokers  who 
make  a  specialty  of  investment  conditions  and 
others  who  hire  men  for  no  other  purpose  than 
to  hunt  out  good  investments.  They  are  part 
of  the  formulae  which  will  be  presented  to  you. 


Corporate  Reports 

In  the  goodness  of  your  heart,  Mr.  Average 
Investor,  you  purchased  five  shares  of  Southern 
Pacific,  gave  it  to  your  wife  and  had  the  stock 
transferred  to  her  name.  One  day,  while  you 
are  at  business,  the  postman  brings  a  200-page 
yearly  report  to  your  wife.  It  contains  a  spe- 
cial message  from  the  president  to  stockholders, 
another  from  the  treasurer,  a  certified  statement 
from  the  accountants,  and  20  or  30  exhibits, 
ending  up  with  a  wonderful  map  of  the  United 
States  with  the  Southern  Pacific  road  superim- 
posed in  red  lines. 

You  watch  vour  wife  with  much  interest.    She 


144  WHAT  EVERY  INVESTOR 

glances  through  the  costly  report  and  reaches  the 
map.  She  notes  Oshkosh,  where  her  sister  lives, 
turns  the  book  over  and  quietly  drops  it  in  the 
library  waste  basket.  Later,  after  she  has  re- 
tired, you  fish  it  out  and  note  that  the  president 
says  everything  is  running  well  and  that  it  is 
costing  the  company  much  money  for  taxes.  But 
the  report  does  not  mean  much  to  you  unless 
you  have  learned  to  separate  the  chaff  from  the 
wheat.  The  fact  that  your  road  earned  $13  a 
share  during  the  year  means  little  unless  you  have 
the  comparison  of  former  years,  the  comparison 
with  other  trunk  lines  in  the  same  territory,  the 
condition  of  surplus,  the  item  of  depreciation,  the 
condition  of  the  rolling  stock,  etc. 

You  have  been  a  very  busy  man  accumulating 
money  to  invest,  but  you  have  not  had  the  time 
or  inclination  to  become  a  specialist  in  reading 
a  railroad  report.  The-same  situation  applies  to 
your  industrial,  mining  and  public  utility  stocks. 
Your  bond  investments  demand  a  separate  train- 
ing. It  is  clear  that  to  protect  yourself  you 
should  at  least  know  how  to  ask  questions  and 
learn  who  are  the  proper  authorities  to  answer 
them. 


OUGHT  TO  KNOW  145 

Subway  and  Office  Gossip 

The  writer  knew  of  one  man  who  bought  100 
shares  of  U.  S.  Steel  preferred  as  an  investment. 
He  was  sitting  in  his  broker's  office  when  he  re- 
ceived the  report.  Another  customer,  of  a  specu- 
lative type,  made  a  remark  which  he  overheard. 
He  did  not  know  the  man  and  the  remark  was 
made  to  a  third  customer  likewise  unknown  to 
the  involuntary  eavesdropper.  The  remark  was : 
"I  believe  the  Steel  stocks  are  going  to  the  dogs." 

Our  investor  felt  that  he  had  made  a  mistake. 
He  wanted  to  sell  his  recent  purchase  right 
away  and  had  to  use  considerable  will  power  to 
hold  faith  in  his  judgment. 

How  many  of  you,  Average  Investors,  have 
been  influenced  by  remarks  overheard  in  the 
subway,  street  cars,  trains  and  other  public 
places?  Probably  hundreds  of  thousands  of 
shares  and  millions  in  bonds  have  been  purchased 
and  sold  as  the  consequence  of  involuntary  eaves- 
dropping in  public  places.  It  is  a  true  bill  against 
the  uneducated  condition-  of  the  average  inves- 
tor. The  chances  are  nine  hundred  and  ninety- 
nine  in  one  thousand  that  the  speaker  knows  no 
more  about  an  investment  than  you  know  about 


146  WHAT -EVERY  INVESTOR 

the  lumber  business,  and  yet  you  permit  yourself 
to  be  influenced  by  a  man  who  is  probably  more 
ignorant  than  yourself. 

The  Lure  of  the  Pamphlet 

"Diamond  Jim"  Brady  was  one  of  the  greatest 
salesmen  which  this  country  ever  produced.  As 
an  efficient  business  man  lie  possessed  a  world- 
wide reputation.  His  associates  were  railroad 
presidents  and  men  high  in  finance.  Yet  his  es- 
tate was  chock  full  of  worthless  shares.  Wheth- 
er these  were  purchased  to  please  casual  friends 
or  because  of  the  representations  of  literary  (  ?) 
prospectuses  no  one  will  ever  know.  There  is 
no  difference  in  the  psychology  or  the  material 
result.  A  friend  who  has  "a  good  thing"  and  a 
glowing  prospectus  are  twin  brother. 

This  does  not  mean  that  every  efficient  and 
alluring  prospectus  is  untrue  and  does  not  rep- 
resent a  good  investment.  But  the  average  in- 
vestor must  not  base  his  judgment  on  the  evi- 
dence submitted  by  the  plaintiff.  Credible  wit- 
nesses are  just  as  important  to  an  investment  as 
they  are  to  substantiate  evidence  in  law.  Where 
will  vou  find  these  witnesses? 


OUGHT  TO  KNOW  147 

The  Formula  for  Mr.  Average  Investor 

(1)   He  must  know  what  questions  to  ask. 

a.  Is  this  the  right  investment  for  me  and 

my  capital? 

b.  Have  I  followed  "Jonn  K.  King's"  for- 

mula? 

c.  Have  I  verified  the  newspaper  reports? 

d.  Have  I  asked  the  right  questions  about 

the  report  ? 

1.  What  are  the  questions  to  ask  aboui 

railroads  ? 

2.  What  are  the  questions  to  ask  about 

industrials  ? 

3.  What  are  the  questions  to  ask  about 

oils? 

4.  What  are  the  questions  to  ask  about 

mining  stocks  ? 

5.  What  are  the  questions  to  ask  about 

bonds  ? 

6.  What  are  the  questions  to  ask  about 

public  utilities? 

7.  What  are  the  questions  to  ask  about 

this  investment? 

e.  Have  I  given  ''Dame  Rumor"  too  much 

credence  ? 


148  WHAT  EVERY  INVESTOR 

f.  Have  I  checked  up  the  statements  of  the 
prospectus  ? 

(2)   He  must  know  where  to  get  his  informa- 
tion. 

a.  What  does  my  investment  broker  think? 

1.  Has  he  any  interest  in  the  security? 

2.  Is  he  antagonistic  for  personal  rea- 

sons? 

b.  What  does  my  banker  think  of  its  worth  ? 

1.  Is  his  conservatism  too  pronounced? 

2.  Is  his  ability  any  better  than  mine  to 

analyze  ? 

c.  What   is   the   judgment   of   my  financial 

publication  ? 

1.  Have  they  any  personal  interest  in 

the  security? 

2.  Have  they  given  me  a  definite  opin- 

ion? 

3.  Have  they  ferreted  out  the  essential 

facts? 

4.  Are  they  equipped  with  trained  ex- 

perts,  accurate  statistics  and  sea- 
soned judgment? 

I  firmly  believe  that,  everything  considered,  the 
Analytical  Bureaus  of  unprejudiced  financial 
publications  are  the  best  source  of  information 


OUGHT  TO  KNOW  149 

on  which  to  base  your  decisions.  It  is  their 
business,  and  like  the  competent  lawyer  they 
have  the  data  and  information  on  which  their 
opinions  are  based.  You  must,  however,  have 
some  basis  of  knowledge  on  which  to  ask  the 
proper  questions  and  understand  the  answers 
when  you  get  them. 


150  WHAT  EVERY  INVESTOR 

CHAPTER   XII 

One  Hundred  Books  to  Read 

A  Classification  of  the  Best  Books  for  Study 
By  the  Investor 

IN  all  the  preceding  articles  of  this  series,  the 
author  has  bared  the  fundamental  features 
which  every  investor  should  have  in  mind  be- 
fore making  an  investment.    The  field  is  so  vast 
that  it  is  not  possible  to  go  into  detail  for  each 
subject.     But  the  reader  has  no  doubt   felt  a 
desire  to  go  deeper  into  one  or  more  phases,  and 
it  is   for  this  purpose  that  the  One  Hundred 
Books  are  listed  and  grouped  for  him  in  this  ar- 
ticle. 

The  Groups 

The  elementary  books  cover  the  subject  as  a 
whole  in  Group  I.  They  place  before  the  student 
the  geography  and  the  machinery  of  the  subject. 

Group  II  deals  with  the  definitions  of  invest- 
ments, shows  which  are  good  and  which  are  bad. 


OUGHT  TO  KNOW  151 

It  takes  into  consideration  the  different  reasons 
why  investments  are  made,  such  as  for  income, 
for  profits,  etc. 

Group  III  contains  the  only  fundamental  books 
known  on  the  subject  of  speculation.  Almost  all 
other  speculative  books  deal  in  generalities  and 
are  not  the  result  of  actual  study  and  experience, 
nor  do  other  books  express  themselves  in  as 
definite  a  manner  with  so  many  concrete  ex- 
amples. 

Intermediate  Studies 

The  books  in  this  group  cover  the  entire  sub- 
ject of  finance.  They  can  be  understood  and 
appreciated  by  all  readers  who  have  thoroughly 
understood  the  books  in  the  preceding  groups. 
Their  purpose  is  to  go  deeper  into  the  structure 
of  corporate  history  and  to  take  up  the  more 
intricate  forms  of  investment  and  speculative 
machinery. 

The  Various  Branches 

Group  V  takes  into  consideration  a  study  of 
the  various  forms  of  corporate  enterprise  and 


152  WHAT  EVERY  INVESTOR 

also  the  principal  commodities.  Collateral 
branches  of  investment  such  as  land  mortgages, 
farm  loans  and  insurance  are  not  taken  up  in 
detail  but  are  covered  in  an  elementary  form 
in  other  books,  such  as  Book  4  in  Group  II. 
These  books  are  self-explanatory  to  the  student 
from  the  very  nature  of  the  subjects,  but  they 
will  not  be  fully  understood  nor  their  applica- 
tion in  a  practical  way  established  unless  they 
are  studied  after  a  course  in  the  former  groups. 

The  Post  Graduate  Course 

The  books  listed  in  Group  VI  are  not  ones 
which  the  novice  will  understand  or  appreciate. 
They  state  much  of  the  theory  of  finance  which 
is  only  applicable  after  the  student  has  a  basic 
knowledge  of  the  subject.  Book  6,  for  example, 
would  not  be  intelligible  to  the  novice  nor  could 
he  use  the  information  until  he  was  able  to  com- 
prehend the  relationship  of  banking  with  con- 
ditions affecting  the  price  of  securities. 

Do  not  for  one  moment  think  that  these  hun- 
dred books  can  be  read  and  digested  in  one  year 
or  two  years.  Nor  does  the  author  suggest 
that  the  knowledge  gained  from  this  reading  may 


OUGHT  TO  KNOW  153 

be  utilized  to  personal  practical  advantage  with- 
out the  actual  experience  of  doing  the  things 
which  are  discussed. 

If  you,  reader,  have  been  speculating  in  min- 
ing stocks,  you  will  desire  to  read  the  books  of 
Group  I,  Group  III,  Books  2,  3,  6,  8,  11,  14  and 
16  of  Group  IV  and  have  on  hand  all  the  books 
of  Group  V  under  the  head  of  Mines  and  Oils. 
If  your  desire  to  trade  in  wheat,  you  will  choose 
from  the  titles  the  books  which  you  know  will 
be  of  practical  use  to  you  from  the  groups. 

While  it  is  a  well  known  fact  that  most  people 
desire  the  name  of  investor  and  taboo  the  name 
of  Speculator,  yet  neither  Investor  nor  Specula- 
tor should  omit  a  study  of  either  one  of  the  sub- 
jects. Group  II  is  very  much  inter-related  with 
Group  III  and  the  fundamental  features  dovetail. 

Magazine  and  Papers 

The  student  of  finance  must  of  necessity  keep 
up  to  the  times.  He  must  read  his  morning 
and  evening  papers  especially  for  the  statistics 
and  the  general  news.  Note  Book  5  of  Group  I. 
It  is  also  well  for  him  to  subscribe  for  some  peri- 
odical which  will  help  to  arrange  his  statistics  in 
understandable  form.  There  are  a  number  of 


154  WHAT  EVERY  INVESTOR 

New  York  newspapers  which  issue  yearly  finan- 
cial reviews  containing  these  essential  statistics 
and  the  bound  volumes  of  THE  MAGAZINE  OF 
WALL  STREET  contain  railroad,  industrial,  and 
banking  statistics  for  years  back. 

Each  trade  has  its  publication — many  of  the 
trades  have  two  or  more  publications  devoted  ex- 
clusively to  the  one  business. 

Other  publications  which  will  be  of  assistance 
to  the  advanced  student  are  the  London  Econo- 
mist, New  York  Journal  of  Commerce,  Wall 
Street  Journfd,  The  Commercial  and  Financial 
Chronicle  and  The  Bankers  Magazine.  The  re- 
ports of  the  United  States  Interstate  Commerce 
Commission,  United  States  Treasury  Department 
reports  and  the  reports  of  Gas  and  Electric  Light 
Commissioners  of  the  various  states  may  be  ob- 
tained without  much  trouble  and  at  a  small  cost, 
or  may  be  found  on  file  at  the  principal  libraries. 
But  there  is  no  other  non-technical  magazine  cov- 
ering the  elementary  ground  of  all  branches 
except  THE  MAGAZINE  OF  WALL  STREET. 

A  Short  Course  from  the  Elementary 

For  those  who  are  desirous  of  reading  only  a 
few  books  on  the  subject,  the  following  list  has 


OUGHT  TO  KNOW  155 

been  suggested  to  the  author  by  one  of  the  best 
students  of  finance,  comprising  investment  and 
speculation,  who  writes  much  for  the  public : 
Introductory: 

Money  and  Investments. — Rollins. 

The  Machinery  of  Wall  Street.— Seldon. 

How  to  Read  the  Fnancial  Page. — Browne. 

You  and  Your  Broker. — Smitley. 
Investment: 

The  Careful  Investor. — Meade. 

Investing  for  Profit. — Selden. 

The  Working  of  the  Railroads. — McPherson. 

Investors'  Pocket  Manual. 
Speculation: 

Practical  Points  on  Stock  Trading. — Scribner 
Browne. 

Psychology  of  the  Stock  Market. — Selden. 

Studies  in  Tape  Reading. — "Rollo  Tape." 

Fourteen  Methods  of  Operating  in  the  Stock 

Market. 
Banking,  Finance,  Economics: 

Principles  of  Money  and  Banking. — Conant. 

Principles  of  Bond  Investment. — Chamberlain. 

Principles  of  Economics. — Seligman. 

Financial  Crises. — Burton. 

Financial  Statements  Made  Plain. — Saliers. 


156 


WHAT  EVERY  INVESTOR 


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OUGHT  TO  KNOW  159 


CHAPTER    XIII 

Liberty  Bonds 
Points  of  Interest  to  Holders 

SECURITY— The  credit  of  the  United  States 
Government,  of  which  all  these  bonds  are  a 
direct  obligation. 

Any  investor  receiving  a  prospectus  with  the 
above  description  need  go  no  further  in  his  in- 
vestigation as  to  the  advisability  of  purchasing 
any  class  of  Liberty  Bonds.  Even  if  the  patri- 
otic motive  for  investing  were  eliminated — which 
is  an  almost  impossible  conception — the  invest- 
ment would  stand  as  the  most  secure  which  has 
ever  been  presented. 

It  is  perfectly  evident  that  some  day  Liberty 
Bonds  may  sell  for  105,  110  or  possibly  115. 

What  Is  a  Liberty  Bond? 

A  Liberty  Bond  is  an  evidence  of  an  obliga- 
tion of  our  Government  to  pay  back  at  a  speci- 
fied time  money  which  is  loaned  to  the  Govern- 
ment by  you.  The  Government  agrees  to  pay 


160  WHAT  EVERY  INVESTOR 

interest  to  the  lender  every  six  months  at  a  spec- 
ified rate  and  to  return  the  entire  principal  at  a 
given  time.  The  lender  not  only  is  credited  with 
patriotic  motives,  but  makes  the  most  conserva- 
tive investment  ever  known. 

What  Kinds  of  Bonds  Now  Exist? 

1.  The  first  loan  offered  the  lender  3V2  per 
cent.,  and  the  face  value  of  the  bonds  is  due 
June  15,  1947,  though  redeemable  on  and  after. 
These  bonds  are  exempt  from  all  taxation  ex- 
cept the  inheritance  tax,  which  is  collected  from 
the  owner's  estate.  They  may  be  exchanged  for 
other  bonds  bearing  the  same  or  a  higher  rate  of 
interest  of  any  future  issue  which  may  be  sold 
during  the  war. 

These  bonds  have  the  best  conditions  for  the 
wealthy  man  who  pays  a  large  tax  and  they  have 
the  best  conversion  privilege,  for  they  may  be 
converted  into  finy  future  issue.  The  interest  is 
payable  on  June  15  and  December  15  of  each 
year. 

There  are  both  registered  and  coupon  forms, 
but  it  is  not  advisable  for  the  small  holder  to 
register  these  bonds;  for,  though  greater  pro- 
tection  is  gained  against  loss,  this  factor  is  offset 


OUGHT  TO  KNOW  161 

by  the  red  tape  and  intricate  detail — also  delay — 
in  releasing  them  for  sale  or  future  conversion. 
Special  government  forms  are  necessary,  the 
affidavits  of  National  Bank  officers,  and  other  in- 
convenient guarantees.  If  desired,  the  face  value 
can  be  paid  in  1932,  a  matter  which  is  at  the 
option  of  our  Government. 

2.  The  second  loan  was  issued  by  the  Govern- 
ment at  4  per  cent.  These  bonds  were  issued  in 
November,  1917,  and  the  Government  promises 
to  pay  the  face  value  in  1942,  with  the  option 
of  paying  them  in  1927,  if  so  desired  by  the 
Government.  The  interest  is  paid  every  six 
months  of  May  15  and  November  15,  at  4  per 
cent.,  or  2  per  cent,  each  period. 

These  bonds  are  exempt  from  all  taxes  also, 
except  the  inheritance  tax,  as  in  the  case  of  tne 
first  issue,  and  except  the  income  surtaxes,  ex- 
cess profits  and  war  profits  tax.  Any  individual 
owning  $5,000  or  less  of  these  bonds  can  exempt 
the  income  from  this  amount  from  the  surtax. 
But  all  those  who  pay  a  surtax  on  their  incomes 
will  have  to  include  income  from  these  bonds 
over  that  accruing  from  $5,000  or  more. 

For  the  very  rich  man  and  wealthy  corpora- 
tions these  bonds  are  not  as  profitable  for  hold- 


162  WHAT  EVERY  INVESTOR 

ings  because  the  tax  paid  on  the  income  would 
more  than  offset  the  %  per  cent,  difference  in 
interest  rate.  These  bonds  can  be  exchanged  for 
later  issues  bearing  a  higher  rate.  Later  issues 
cannot  be  exchanged  for  the  second  or  third  issue 
bearing  a  higher  rate. 

3.  The  converted  4  per  cent,  bonds  are  those 
which  are  the  result  of  lenders  changing  the  first 
issue  of  3%'s  into  the  next  loan.     These  con- 
verted 4  per  cent.'s  are  due  to  be  paid  off  in 
1947,  with  the  option  on  the  part  of  the  Gov- 
ernment of  paying  them  in  1932.     The  exemp- 
tion privileges  are  exactly  the  same  as  the  Sec- 
ond 4  per  cent.'s  and  the  possibility  of  exchange 
into  later  issues  is  the  same  as  the  Second  4 
per  cent.'s.     The  man  who  exchanged  his  3^'s 
for  4  per  cent.'s  can  exchange  for  the  next  issue 
if  he  thinks  it  advisable,  but  the  man  who  re- 
tained his  original  3^  per  cent.'s  can  exchange 
for  any  future  long  term  issue.    The  interest  on 
these  bonds  is  due  June  15  and  December  15,  the 
same  dates  as  the  3%  per  cent,  bonds. 

4.  The  third  loan  was  issued  by  the  Govern- 
ment at  4^4  per  cent.    These  bonds  were  issued 
during  the  first  days  of  May,  1918,  and  the  Gov- 
ernment promises  to  pay  the  face  value  on  Sept. 


OUGHT  TO  KNOW  163 

15,  1928.  They  cannot  be  redeemed  before  this 
date  except  for  purchase  for  the  account  of  the 
Sinking  Fund.  The  interest  is  paid  every  six 
months  on  March  15  and  Sept.  15  at  4)4  per 
cent,  or  2%  per  cent,  each  period. 

Bonds  of  this  issue  are  not  convertible  into  any 
future  loan  nor  are  any  4}4  per  cent,  bonds  ac- 
cruing from  the  conversion  of  any  previous  issue 
again  convertible  into  future  issues. 

5.  The  fourth  4% s  were  issued  in  October, 
1918.     Interest  at  the  rate  of  2%  per  cent,  is 
to  be  paid  each  April  15  and  October  15,  and  the 
principal   is   to   be   paid   on   October    15,    1938, 
though  the  Government  may  repay  the  principal 
at  any  time  after  October  15,  1933.    These  bonds 
are  not  convertible  into  later  series  of  bonds  or 
notes  issued,  but  bonds  may  be  purchased  or 
redeemed  through  sinking  fund  as  may  any  other 
series  of  Liberty  bonds  excepting  Liberty  3^s. 
Status  as  to  taxation  same  as  other  4%s,  ex- 
cepting that  the  income  from  $30,000  principal 
value  of  this  issue  is  exempt  from  surtax  war- 
profits  and  excess-profits  taxes   for  two  years 
after  the  end  of  the  war. 

6.  The  first  Liberty  Loan  Converted  4^4  were 
also  issued  in  October,  1918.     Their  interest  is 


164  WHAT  EVERY  INVESTOR 

payable  each  April  15  and  October  15  at  the  rate 
of  2%  per  cent.  Maturity  same  as  first  3%s, 
June  15,  1947.  Sinking  fund  identical  with  that 
for  third  and  fourth  4*4 s.  Bonds  not  convertible 
into  any  other  series.  Taxation  features  similar 
to  those  of  fourth  4%s. 

7.  The  Victory  3%s  were  issued  in  May,  1919, 
and  are  due  on  May  20,  1923,  though  redeemable 
after  June  15,  1922.     Interest  is  payable  semi- 
annually  on  June  15  and  Dec.  15.    Interest  from 
any  amount  of  these  is  free  from  income  taxa- 
tion.   Like  the  first  3%s,  the  Victory  3^4s  should 
appeal  chiefly  to  the  large  investor.    Sinking  fund 
provided    for   redemption   or   purchase   of   this 
issue.    Not  convertible  into  any  other  series,  but 
are  interchangeable  with  the  Victory  4*}4  s. 

8.  The  Victory  4^4  s  have  the  same  maturity, 
redemption  features  and  dates  for  payment'  of 
interest  as  the  Victory  3%s.     They  also  were 
issued  in  May,  1919.    Their  interest  is  free  from 
the  normal  income  tax,  regardless  of  the  amount 
held,  but  is  subject  to  the  surtax,  the  excess- 
profits  and  war-profits  taxes.     Sinking  fund  is 
provided   for  purchase  or  redemption  of  these 
bonds.    They  are  not  convertible  into  any  other 


OUGHT  TO  KNOW  165 

series,  excepting  that  the  3  24s  and  this  issue  are 
interchangeable. 

The  man  who  did  not  convert  his  original  3% 
per  cent,  bonds  into  the  4  per  cent.'s  of  the  sec- 
ond issue  had  the  privilege  of  converting  them 
into  the  4%  per  cent,  bonds  of  the  third  issue  up 
until  Nov.  9,  1918,  but  not  thereafter.  When  he 
got  the  new  4^4  per  cent,  through  such  conver- 
sion the  date  on  which  the  Government  will  pay 
him  the  face  value  of  his  bonds  is  the  same  date 
as  that  on  which  the  3%  per  cent,  bonds  will  be 
paid  and  not  1928. 

Those  who  converted  the  3%  per  cent,  bonds 
into  4  per  cent,  bonds  of  the  second  loan  also 
had  the  privilege  of  again  converting  these 
"First  Conversion  4  per  cent.'s"  into  the  4}4 
kind  up  until  Nov.  9,  1918.  These  bonds  will  of 
course  have  the  same  date  for  the  payment  of 
principal  as  the  original  3^  per  cent.'s  (1932- 
1947). 

The  man  who  purchased  the  original  bonds  of 
the  second  issue,  or  the  4  per  cent,  due  1927- 
1942,  had  the  privilege  of  converting  them  into 
these  new  4^4  per  cent,  bonds  until  Nov.  9,  1918, 
but  the  date  for  payment  of  principal  will  be  the 
same  as  before  (1927-42). 


166  WHAT  EVERY  INVESTOR 

How  Should  They  Be  Kept? 

The  matter  of  registration  of  all  three  classes 
of  bonds  will  of  course  protect  the  holder  against 
loss,  but  this  element  of  protection  would  not 
seem  to  be  of  such  importance  as  the  problem  of 
releasing  them  for  sale,  borrowing  purposes  or 
conversion.  It  is  therefore  advisable  for  the 
small  investor  to  keep  his  bonds  in  coupon — 
easy-to-dispose-of — form. 

These  coupon  bonds  are  not  much  different 
from  gold  coin  or  bills.  If  they  are  lost  there 
seems  little  likelihood  of  recovery  even  if  the 
numbers  are  known,  for  these  bonds  are  the  most 
negotiable  form  of  bond  known.  If  the  bonds 
are  lost  in  coupon  form  you  cannot  get  new  ones. 
The  best  that  can  be  done  is  to  notify  the  Treas- 
ury,  Department  in  Washington  and  your  Cen- 
tral Federal  Reserve  Bank  to  try  to  look  out  for 
them. 

Bonds  which  have  become  mutilated  may  be 
replaced  by  the  United  States  Treasury  when 
proper  affidavits  are  made  to  the  Treasury  offi- 
cials and  a  bond  of  indemnity  is  given  by  the 
owner.  The  sum  and  substance  of  the  matter 
is  that  the  owner  has  just  about  as  much  chance 


OUGHT  TO  KNOW  167 

of  recovering  lost  Coupon  Liberty  Bonds  as 
he  has  to  recover  a  twenty-dollar  bill. 

Xot  every  investor  in  these  bonds  feels  that 
he  can  afford  a  safe  deposit  vault.  If  this  is 
true,  it  is  best  to  apply  to  the  bank  or  trust  com- 
pany in  your  city  or  town  and  ask  them  to  help 
you  out  of  your  troubles. 

If  you  can  afford  a  safe  deposit  box — cost 
from  $2.50  per  year  upwards — by  all  means  rent 
one  and  put  your  bond  in  it  and  whatever  other 
valuables  it  may  hold  which  you  have  been  hiding 
in  bureau  drawers  or  tucked  away  in  mat- 
tresses. Do  not  carry  these  bonds  on  your  per- 
son or  leave  them  in  your  home,  for  there  are 
very  few  burglar  or  fire  insurance  policies  which 
will  cover  the  loss  of  your  Liberty  Bonds. 

How  Can  You  Collect  the  Interest? 

If  your  bonds  are  registered,  you  will  receive 
a  check  from  the  United  States  Government  on 
your  interest  day.  You  must  be  sure  that  the 
United  States  Treasury  Department  has  your 
proper  name  and  address.  If  you  have  coupon 
bonds,  cut  off  the  coupon  which  corresponds  with 
the  interest  date  due — be  very  careful  to  cut  off 
only  the  coupon  due — and  present  it  to  any  bank, 


168  WHAT  EVERY  INVESTOR 

trust  company  or  postoffice  which  has  a  money 
order  department.  Your  broker  also  will  cash 
the  coupon  for  you. 

Those  who  own  3^  and  3^4  per  cent,  bonds 
do  not  need  any  form  of  ownership  certificate — 
re  income  tax — to  get  their  interest.  Those  who 
own  more  than  $5,000  face  value  of  the  Second 
4  per  cent.,  the  Converted  4  per  cent.,  the  Third 
4^4  per  cent,  or  any  of  the  converted  444  Per 
cent.'s  or  more  than  $30,000  of  the  4th  4^8 
•will  be  compelled  to  furnish  an  ownership  certifi- 
cate before  collecting  their  interest.  The  latter 
exemption  holds  for  only  two  years  after  the 
termination  of  the  war. 

This  article  cannot  enter  into  the  various  kinds 
of  forms  to  meet  certain  conditions,  but  the  ad- 
vice is  to  go  to  your  bank,  trust  company,  broker 
or  postmaster  and  get  the  proper  information 
from  him.  Many  stores  and  mercantile  firms  will 
accept  your  coupons  the  same  as  cash,  if  no  in- 
come tax  ownership  certificate  blank  is  neces- 
sary. If  you  lose  a  coupon  your  chance  of  .re- 
placing it  is  about  one  in  a  million,  so  be  very 
careful  not  to  let  it  get  away  from  you,  but  cash 
it  as  soon  as  possible  after  cutting  it  from  your 
bond. 


OUGHT  TO  KNOW  169 

Many  bonds  have  but  a  few  years'  supply  of 
coupons  on  them.  When  the  set  on  your  bond 
comes  to  an  end,  take  the  bond  to  your  bank  or 
broker,  who  will  send  it  to  the  proper  place  to 
have  additional  coupons  put  on.  Do  not  try  to 
do  this  yourself.  Always  take  a  receipt  for  your 
bond  when  left  with  your  bank,  broker  or  post- 
office. 

How  Can  You  Buy  and  Sell  Bonds? 

The  principal  market  for  Liberty  Bonds  is  in 
New  York  City  on  the  New  York  Stock  Ex- 
change. But  this  market  is  mainly  for  denomi- 
nations of  $1,000  and  up.  There  are  a  number 
of  firms  who  make  a  specialty  of  the  smaller  or 
"baby"  bonds,  and  your  bank  or  trust  company 
will  be  glad  to  have  your  order  carried  out.  A 
National  Bank  is  really  a  Government  institution 
and  should  you  meet  with  a  rebuff  or  a  refusal, 
find  out  the  name  of  the  nearest  Central  Federal 
Reserve  Bank  and  communicate  direct  with  them. 
Beware  of  brokerage  firms  and  stock  brokerage 
firms  about  which  you  know  little  or  nothing. 
If  you  are  located  in  a  large  city,  you  can  find 
out  which  are  responsible  and  which  are  not, 
but  those  bond  holders  residing  in  smaller  towns 


170  WHAT  EVERY  INVESTOR 

or  in  the  country  who  have  not  had  dealings 
with  brokers  should  ''play  safe"  and  go  to  their 
banks  or  postmaster  for  advice. 

It  may  be  that  the  buyer  of  a  $50  or  $100 
Liberty  Bond  will  have  to  pay  just  a  trifle  more 
in  the  open  market  than  he  would  for  the  $500 
or  $1,000  bond.  He  may  also  get  a  trifle  less 
on  sale,  but  the  difference  is  so  small  as  to  be 
hardly  noticed.  The  variation  between  bid  and 
offer  of  these  bonds  can  be  as  close  as  two  cents 
for  every  $100  face  value  of  bond. 

If  you  sell  your  bond  between  interest  dates, 
you  will  receive  the  accrued  interest  from  the 
last  date  of  payment,  but  the  next  coupon  will 
go  with  the  bond.  The  buyer  pays  you  the  pro- 
portion of  interest  you  are  entitled  to  up  to  the 
date  you  sold  him  your  bond.  In  like  manner, 
if  you  buy  a  bond,  you  must  pay  the  seller  his 
accrued  interest  up  to  the  date  of  purchase. 

You  will  find  quotations  for  all  Liberty  Bonds 
in  the  city  papers,  or  your  bank  will  tell  you  the 
market  price.  There  is  no  reason  why  you 
should  sell  at  any  less  figure,  and  beware  of  those 
who  desire  to  buy  your  bonds  at  less  than  the 
quoted  price. 

If  you  cannot  pay  for  your  bonds  in  full  at 


OUGHT  TO  KNOW  171 

the  time  the  Government  requires  the  money,  or 
if  you  wish  to  save  money  by  purchasing  these 
bonds  on  the  installment  or  partial  payment  plan, 
you  will  find  reputable  firms  which  make  a  busi- 
ness of  this  form  of  purchase.  Many  local 
banks  will  be  glad  also  to  arrange  terms  for  your 
convenience,  but  these  reputable  brokerage  and 
investment  firms  have  special  plans  for  the  small 
investor  which  will  be  communicated  to  him  upon 
his  inquiry. 

How  Can  You  Borrow  on  Your  Bonds? 

If  you  find  yourself  in  dire  need  of  funds, 
it  is  not  necessary  to  sell  your  bonds.  You  can 
borrow  on  them  until  such  a  time  as  your  finan- 
cial condition  is  improved.  Any  bank  will  help 
you,  and  many  firms  make  it  a  business  of  loan- 
ing money  on  these  bonds.  Do  not  borrow  un- 
less the  lender  gives  you  at  least  90  per  cent,  of 
the  market  value  of  your  bond.  If  your  bond  is 
valued  at  97  and  the  face  value  is  $100,  you 
should  get  about  $87.50  as  a  loan.  Under  no 
conditions  should  you  be  charged  more  than  6 
per  cent,  for  the  amount  borrowed,  and  the  in- 
terest from  the  bond  put  up  as  collateral  belongs 
to  you  when  it  is  due. 


172  WHAT  EVERY  INVESTOR 

You  can  borrow  with  an  understanding  that 
you  will  pay  the  entire  amount  borrowed  at  a 
certain  time  or  you  can  borrow  with  the  under- 
standing that  you  will  pay  the  loan  in  install- 
ments. In  the  latter  case  you  must  be  certain 
that  you  are  given  credit  for  the  installments 
paid  in  and  no  interest  is  charged  on  these  in- 
stallments. 

It  is  necessary  for  you  to  make  certain  that 
you  get  a  receipt,  or  form  of  agreement,  for 
the  loan  made,  so  that  there  will  be  no  dispute 
in  the  future.  This  agreement  or  receipt  should 
be  cared  for  just  the  same  as  if  it  were  the 
actual  bond. 

In  Recapitulation 

At  the  time  this  book  goes  to  press  there  are 
the  following  kinds  of  Liberty  Bonds  in  exist- 
ence: 

1.  15-30    Year    First    Liberty    Loan    Zl/2%    Payable 
1932-1947. 

2.  15-30  Year  Converted  4%  Payable  1932-1947. 

3.  15-30  Year   Re-Converted    4*4  %    Payable    1932- 
1947. 

4.  10-25  Year    Second    Liberty    Loan    4%    Payable 
1927-1942. 

5.  10-25  Year  Converted  4^%  Payable  1927-1942. 


OUGHT  TO  KNOW  173 

6.  10  Year  Third  Liberty  Loan  4%%  Payable  1928. 

7.  14-25  Year   Fourth  Liberty  Loan  4^%    Payable 
1933-1938 

8.  14-29  Year  First  Liberty  Second  Converted  ^A% 
Payable  1932-1947. 

9.  3-4  Year  Victory  Liberty  3^%  Payable  1922-1923. 
10.    3-4  Year  Victory  Liberty  4^%  Payable  1922-1923. 

Number  1  may  be  converted  into  any  future 
loan  running  5  years  or  more  and  bearing  a 
higher  rate  of  interest. 

Number  2  may  be  converted  into  the  4^  which 
ends  the  privilege. 

Number  3  has  no  further  conversion  priv- 
ilege. 

Number  4  may  be  converted  into  the  4*4  Per 
cent,  which  ends  the  privilege. 

Numbers  5,  6,  7  and  8  have  no  further  con- 
version privilege. 

Numbers  9  and  10  are  interchangeable. 

It  is  very  important  to  remember  that  when 
any  bond  is  converted  into  another  issue  it  con- 
tinues to  bear  the  same  interest  dates  and  date 
for  redemption  which  it  originally  had.  Con- 
version, however,  changes  the  interest  rate,  tax- 
ation feature  and  conversion  privilege  into  those 
of  the  bonds  into  which  they  were  converted. 


174  WHAT  EVERY  INVESTOR 

In  Conclusion 

If  there  are  any  questions  which  this  article 
does  not  cover  and  about  which  you  desire  infor- 
mation, your  local  bank  officials  will  be  glad  to 
answer  them  for  you. 

It  is  your  duty,  patriotic  and  personal,  to  know 
everything  there  is  to  know  about  your  bond. 
Read  what  is  printed  on.  the  body  of  the  bond ; 
read  what  is  on  the  coupon;  understand  every 
feature  and  item  connected  with  it.  This  lesson 
is  the  first  step  in  your  education  as  an  investor. 

The  people  of  our  country  have  been  poor  in- 
vestors. The  poorest  citizen  of  France  has  known 
all  about  his  Government  bonds  for  hundreds  of 
years.  Our  past  and  future  Liberty  Loans  will 
awaken  an  investment  interest  which  has  come 
to  stay.  You  must  keep  your  education  up  to 
and  above  the  average  of  the  times  and  do  not 
be  afraid  to  ask  about  what  you  do  not  know 
or  what  is  not  clear  to  you. 


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